Question

1. If a Big Mac costs $2.54 in the United States and 294 yen in Japan, what is the estimated exchange rate of dollar per yen as hypothesized by the Hamburger index?
2. Describe the impossible trinity of the currency regime. Provide three examples (countries) of currency regime choices and discuss them.
3. Describe the currency board system and dollarization.
4. Describe the five sub-accounts of BOP. Provide one example of transactions that should be counted into each account.
5. Explain why devaluation of home currency can benefit the home country. Explain the J-Curve Adjustment Path.

Answer 1

ans 1=To compute the 'Hamburger index', we divide the price of a Big Mac in one nation (in its domestic currency) by the price of a burger in the United States, to obtain an exchange rate. We can then compare this rate of exchange to the official foreign rate of exchange to ascertain whether the currency is overvalued/ undervalued against the American dollar.

A Big Mac is priced at ¥294 in Japan & 2.54 dollars in the U.S – if we divide the domestic rate in Japan by the US rate, we will obtain a Hamburger index of Yen115.75/$.