Final answer:
In this scenario, if the fixed exchange rate is 0.07 dollars for 1 peso, and the equilibrium exchange rate is 0.08 dollars for 1 peso, the dollar is undervalued, and the peso is overvalued. Hence, the correct answer is option (4).
Step-by-step explanation:
The equilibrium exchange rate is the rate at which the supply of a currency equals the demand for it in the foreign exchange market. In this case, the equilibrium exchange rate is 0.08 = 1 peso. When the fixed exchange rate is set at 0.07 = 1 peso, it means that the actual exchange rate is lower than the equilibrium rate.
Therefore, the dollar is undervalued and the peso is overvalued in this scenario. This means that the dollar is cheaper than it should be, and the peso is more expensive than it should be based on the equilibrium.