Question

Suppose that the U.S. dollar is worth 22 Mexican pesos. According to PPP, the dollar "should"...

Suppose that the U.S. dollar is worth 22 Mexican pesos. According to PPP, the dollar "should" be worth 20 pesos. We can then say that the dollar is overvalued.

a. true

b. false

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

We know that, dollar is overvalued when,

The cost of a US market basket converted to pesos at the current spot exchange rate is greater than the cost of the basket in Mexico (measured in pesos using PPP).

​​​​​​Here, US dollar is worth 22 in Mexican pesos. Hence, cost of a US market basket converted to pesos at the current spot exchange rate is 22 pesos.

Also, according to PPP, the dollar should be worth 20 pesos. Hence, cost of the market basket in Mexico is 20 pesos according to PPP.

Hence, we can clearly see that, the exchange rate converted value (22 pesos) is higher than the PPP value of dollar (20 pesos).

Hence, dollar is overvalued here.

The above statement is TRUE.

Answer is option (a).

Hope the explanation is clear to you my friend.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
"one u.s. dollar is worth eighteen mexican pesos." that statement is part of microeconomics, because we...
"one u.s. dollar is worth eighteen mexican pesos." that statement is part of microeconomics, because we are talking about the cost in pesos of a single good, namely a dollar. Why is this reasoning incorrect? A. An exchange of dollars for pesos, implicitly, an exchange across international borders. Any such exchange is by definition macroeconomic. B. What makes the statement about dollars and pesos microeconomic is the fact that individual consumers can perform currency exchange transactions. C. Mexico and the...
Assume that the Polish currency (called zloty) is worth $.32. The U.S. dollar is worth .7...
Assume that the Polish currency (called zloty) is worth $.32. The U.S. dollar is worth .7 euros. A U.S. dollar can be exchanged for 8 Mexican pesos. Last year a dollar was valued at 2.9 Polish zloty, and the peso was valued at $.10. a. Would U.S. exporters to Mexico that accept pesos as payment be favorably or unfavorably affected by the change in the Mexican peso’s value over the last year? b. Would U.S. importers from Poland that pay...
Suppose a U.S. firm buys $200,000 worth of stereo speaker wire from a Mexican manufacturer for...
Suppose a U.S. firm buys $200,000 worth of stereo speaker wire from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received). The rising U.S. deficit has caused the dollar to depreciate against the peso recently. The current exchange rate is 5.50 pesos per U.S. dollar. The 90-day forward rate is 5.45 pesos/dollar. The firm goes into the forward market today and buys enough Mexican pesos at...
Assuming no transaction cost, A: You can buy a U.S. dollar for 10 pesos; The bank...
Assuming no transaction cost, A: You can buy a U.S. dollar for 10 pesos; The bank will pay you 9 pesos for a U.S. dollar. B: You can buy a U.S. dollar for .9 euros; The bank will pay you .8 Euros for a U.S. dollar. C: You can buy a euro for 14 pesos. The bank will pay you 13 pesos for a euro. Reorganize the above into $/peso (A), $/euro (B), and euro/peso (C) and identify if triangular...
11. Suppose that apples were the only good produced in the United States and Mexico. In...
11. Suppose that apples were the only good produced in the United States and Mexico. In Mexico, apples sell for 12 pesos apiece. In the Unites states, apples sell for $0.50 apiece. a. According to the theory of Purchasing Power Parity, what is the equilibrium nominal exchange rate between the U.S. dollar and the Mexican peso? What would the real exchange rate between the U.S. and Mexico in that case? b. Suppose the price of apples rises at a rate...
HiTech, Inc. is a U.S. firm with a Mexican subsidiary. The subsidiary reports that its balance...
HiTech, Inc. is a U.S. firm with a Mexican subsidiary. The subsidiary reports that its balance sheet shows the following items: Cash 5,000 pesos Short term securities at market 3,000 Accounts receivable 1,000 Inventories at cost 3,000 Net plant 3,000 Current liabilities 5,000 Long‑term debt 4,000. The current rate is 30 Mexican Pesos=US$1. Assume that the historical rate is 20 pesos per dollar. What is the translation exposure according to the current, current/non‑current, monetary/non‑monetary, and temporal methods?
According to PPP theory, if inflation increases substantially in Malaysia while U.S. inflation remains unchanged, the...
According to PPP theory, if inflation increases substantially in Malaysia while U.S. inflation remains unchanged, the value of the Malaysian ringgit would be expected to strengthen relative to the USD. a. True b. False
Suppose you are a U.S. investor who is planning to invest $865,000 in Mexico. Your Mexican...
Suppose you are a U.S. investor who is planning to invest $865,000 in Mexico. Your Mexican investment gains 10.8 percent. If the exchange rate moves from 13.0 pesos per dollar to 13.3 pesos per dollar over the period, what is your total return on this investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Suppose Mexican central bank chooses to peg the peso to the US dollar and commits to...
Suppose Mexican central bank chooses to peg the peso to the US dollar and commits to a fixed exchange rate of $0.05 per peso (par value). Use a graph of dollar-peso foreign exchange market (you can put dollars per peso on the vertical axis) to show what happens when the Fed pursues contractionary monetary policy. Will peso become overvalued or undervalued? What kind of intervention should Mexican central bank employ to defend the peg?
3. Suppose Mexican central bank chooses to peg the peso to the US dollar and commits...
3. Suppose Mexican central bank chooses to peg the peso to the US dollar and commits to a fixed exchange rate of $0.05 per peso (par value). Use a graph of dollar-peso foreign exchange market (you can put dollars per peso on the vertical axis) to show what happens when the Fed pursues contractionary monetary policy. Will peso become overvalued or undervalued? What kind of intervention should Mexican central bank employ to defend the peg?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT