Question

In Norway, a Big Mac costs 65 Norwegian Krone (NOK), while in the United States, the average cost is $5.71. The implied (Purchasing Power Parity) exchange rate is ___________. The current exchange rate is NOK 9.09/$. The $ cost of a Big Mac in Norway at the current exchange rate is ___________. The NOK is _____________.

Group of answer choices

NOK11.3835/$; $7.15; 25.2% overvalued.

NOK11.3835/$; $7.15; 25.2% undervalued.

NOK 11.3835/$; $5.71; correctly valued.

None of the above.

Answer 1

In Norway, a Big Mac costs 65 Norwegian Krone (NOK), while in the United States, the average cost is $5.71. The implied (Purchasing Power Parity) exchange rate is 65 / 5.71 = 11.3835. The current exchange rate is NOK 9.09/$. The $ cost of a Big Mac in Norway at the current exchange rate is 65 / 9.09 = $7.15. The NOK is undervalued.

Option 2 is correct. NOK11.3835/$; $7.15; 25.2% undervalued.

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