If a Big Mac burger commands identical dollar pricing in New York and London, then ?
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Answer: D. purchasing power parity holds
Explanation
Purchasing power parity states that identical goods should cost the same in different countries. Expressing prices in a common currency allows economists to test whether price levels have equalized. Identical Big Mac pricing across major cities indicates that purchasing power parity holds true. The Big Mac index is a lighthearted informal measure of purchasing power parity created by economists. Law of one price forms the theoretical foundation underlying international purchasing power parity. Exchange rates adjust over time to reflect differences in national price levels and inflation.
Financial analysts use purchasing power parity to evaluate whether global currencies are overvalued. International trade theory relies on price equalization concepts to model exchange rate movements. Global retail corporations monitor price parity indices when expanding operations across borders. Option A assumes inflation rates must equal zero, ignoring general price level changes. Option B arbitrarily sets inflation rates to one percent without theoretical justification. Option C refers to fixed exchange rates rather than the economic concept of price parity.
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