PART A: (5 points) In the United States, the average (US dollar) price of a Big Mac is $5.81. What is the dollar price of a Big Mac in Denmark?

PART B: (5 points) If the law of one price (LOOP) held in the strictest sense for all countries, and the Big Mac is an identical product in all countries, what numbers would we expect to see the column for Under/Overvalued % for any of the countries shown. Why? Suppose that Denmark was always undervalued compared to the US. What might that be telling us about the costs of producing a Big Mac in Denmark compared to the US the costs of labor, rental for a McDonalds restaurant, energy, etc. Explain BRIEFLY.

PART C: (10 points) Suppose that the Danish central bank becomes concerned about inflation in Denmark, so they tighten monetary policy (higher interest rates). Suppose they tighten 1% (100 basis points) while all other countries keep their monetary policy unchanged. What would change would we expect to see in the chart according to the parity conditions we learned in class? Explain BRIEFLY.

The Big Mac index