Final answer:
The equilibrium exchange rate is 0.08 U.S. dollars to 1 peso. If the fixed exchange rate is 0.07 U.S. dollars to 1 peso, the dollar is undervalued and the peso is overvalued in relation to the equilibrium exchange rate.
Step-by-step explanation:
The equilibrium exchange rate is the exchange rate at which the quantity of pesos traded for U.S. dollars is in balance, and there is neither excess demand nor excess supply of either currency. In this case, the equilibrium exchange rate is 0.08 U.S. dollars to 1 peso.
However, if the fixed exchange rate is 0.07 U.S. dollars to 1 peso, it means that the government has set a fixed value for the exchange rate between the two currencies. In this case, the dollar is undervalued and the peso is overvalued in relation to the equilibrium exchange rate. This means that the peso is too expensive and the dollar is too cheap compared to their true values based on market conditions.