Purchasing power parity and exchange rates

Question 1

what does PPP reflect

Answer 1

-whatever exchange rate is between two currencies, should reflect PPP
-whatever basket of goods/services costs in one currency should be able to buy same value in another currency

Question 2

problems with nominal exchange rate and real exchange rate

Answer 2

could be overvalue/undervalued
-real: takes into account inflation

Question 3

how does PPP work floating

Answer 3

-can buy more in one so you do
-increaing demand for the undervalued and take it back to PPP
-but it is about speculation

Question 4

the BIG MAC index

Answer 4

-price of a currency compared to Big Mac in usa
-look at nominal and compare in other currencies