Question

Discuss two ways that you can use to tell whether a currency is currently overvalued or undervalued.

Answer 1

We can determine whether currency is over valued or under valued.REER is an indicator of the competitiveness of a countries currency.Real exchange rate and weights assigned to each country determines whether a countries currency is over valued or under valued.Real exchange rate calculates purchasing power of a currency.When a currency is overvalued,general price level greater than comparable countries.When a currency is undervalued,general price level will be lower than comparable countries.