Question

1.Suppose that a Big Mac costs $5.79 in the US, and CHF 6.5 in Switzerland. You are told that the exchange rate between $ and CHF is CHF=$0.5 From what you know about PPP theory and Law of One Price, the swiss franc is ____________ (undervalued/overvalued/just right)

2.Suppose that a Big Mac costs $5.79 in the US, and CHF 6.5 in Switzerland. You are told that the exchange rate between $ and CHF is CHF=$0.5 From what you know about PPP theory and Law of One Price, the swiss franc in the long run will converge to ________

Answer #1

1) As per the exchange rate 1 CHF = 0.5 dollar or 1 Dollar = 2 CHF.

The price of the Big Mac is $5.9 in the US so in Switzerland, it will be $5.9 x 2 = 11.8 CHF. As per the PPP theory, the cost of Big Mac in Switzerland should be 11.8.

The current price is only 6.5 that means Big Mac is cheaper in Switzerland when compared to the US. The CHF is undervalued. (a currency is considered undervalued when it can buy much lesser goods in other nation at the current exchange price i.e. the Swiss have to pay more for the burger in the US than what they are paying in Switzerland.)

2) The Swiss franc, in the long run, will converge to the "US dollar". ( the Swiss franc has to appreciate against the US dollar. please provide the options to be filled in the blank are they asking about the number i.e. exchange rate, put it in the comment section.)

In the US, the price of a Big Mac is $3.5. In China, the price
of a Big Mac is ￥12.
a. What is the exchange rate of Chinese Yuan under purchasing
power parity?
b. What is the dollar price of Big Mac in China, if the actual
exchange rate is $0.15/￥?
c. Is the Chinese Yuan overvalued or undervalued? By how
much?
d. If China’s GDP in 2018 is ￥80 Trillion, what is its Nominal
GDP in USD (use...

Suppose Big Mac costs 120 pesos in Mexico City and 6 pounds in
London. If the current exchange rate is 25 pesos per pound, then
according to law of one price, pound is ______ and should _______
in the long run.
undervalued; appreciate
overvalued; depreciate
overvalued; appreciate
undervalued; depreciate

If the price of a Big Mac in the country of Hatchland is 4.25
Hatch dollars ($H4.25), the price of a Big Mac in the US is $5.30,
and the exchange rate between the $H and the $ is $1.10/$H,
assuming a Big Mac is a good representation of the cost of goods in
both countries, according to PPP is the Hatch dollar overvalued,
undervalued, or correctly valued. Please show your calculations to
prove your argument. (4 points)

As of Jan 2012, in Canada a Big Mac costs $4.20. In Turkey it
costs 6.5 Lira for the same product. According to the PPP theory,
what would you expect the dollar-lira exchange rate (lira/$) to be?
If the actual exchange rate was 0.93 (lira/$), does this imply that
the Lira is being over or under valued?

Assume the price of a Big Mac in the U.S. is $5.99 and the
price in Turkey is 29 Turkish Lira (TRY). Thus, according to PPP
and the Law of One Price, at the current exchange rate the TRY
is: A. undervalued B. Insufficient information to answer this
question C. correctly valued D. overvalued

[Real Exchange Rate via Big Mac Index: The real cost of
living]
You are planning to visit Sydney, Australia for
the summer session and want to know about the cost of living there
relative to the US. Assume that the price of Big Mac is US is $4.20
(that is, 4.20 USD), while the price of Big Mac in Australia is
5.75 AUD. If today’s exchange rate between the two countries is
1AUD = 0.76 USD, then (1) calculate the...

Consider the following table, adapted from the Big Mac Index
computed by The Economist magazine. The table shows prices of a Big
Mac in local currencies and the current nominal exchange rate
between the local currency and the Canadian dollar.
Country
Big Mac Price
In local currency
Implied PPP
Rate +
Today’s Exchange rate
IC $=
Over (+)/ Under (-) Valuation against the C$, % ++
Canada (C$)
3.73
1.0000 , ----
Argentina (Peso)
14
3.9525
Australia (A$)
4.35
1.0684...

4. A Big Mac costs 190 rupees in India and $5.75 in the United
States. If you use the Big Mac as a “basket” to measure the price
level in a country, what should the $ / rupee rate be? If the
actual rate is $ 0.015 / rupee , then is the rupee over or under
valued? What is real exchange rate in US Big Macs per Indian Big
Macs? (If you took a Big Mac in India, sold...

Assume the reference commodity costs 200 US dollars in New York,
360 Australian dollars in Sydney, 120 pounds sterling in London,
800 yuan in Shanghai and 22,000 yen in Tokyo.
a. What exchange
rates are predicted by the PPP model? List the price of the
Australian dollar, British Pound, Chinese Yuan and Japanese Yen, as
measured in US dollars.
b. Assume the
following current spot exchange rates:
•
us$0.60 per Australian dollar
•
us$1.70 per British pound
•
us$0.20 per...

Foreign Exchange Markets
Example with francs and dollars :
1. Suppose the exchange rate between the Swiss franc and the
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2. If you are contemplating buying a fancy Swiss watch that
costs 1000 francs, how much will it cost you in dollars?
3. If a Swiss is contemplating buying an American pocket
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