Question

MXN/USD .04 in nominal currency exchange rate terms. A Volvo costs $43,000 in the U.S. The same Volvo costs 975,000 Pesos in Mexico. Based on these data points, select all correct responses below.

	I.	The USD is undervalued.
	II.	The USD is overdervalued.
	III.	If PPP were to exist at MXN/USD .04, I would expect to pay 975,000 for the Volvo in Mexico.
	IV.	If PPP were to exist at MXN/USD .04, I would expect to pay 1,075,000 for the Volvo in Mexico.
	V.	I am better off buying the Volvo in the U.S.
	VI.	I am better off buying the Volvo in Mexico.

Answer 1

a) As MXN/USD = .04 / 1

USD > MXN

Therefore USD is overvalued.

b) As Exchange Rate = P1/P2

0.04 = 43000 / P2

P2 = 1075000

c) As In USA price of Volvo is $43000

And Exchange Rate is 0.04

Price of Mexico with regards to Exchange Rate = 975000*0.04 = $39000

Therefore we are better off buying volvo in Mexico

Answer:

II. The USD is overdervalued

IV. If PPP were to exist at MXN/USD .04, I would expect to pay 1,075,000 for the Volvo in Mexico.

Vi. I am better off buying the Volvo in Mexico.