Question

Assume that the Big Mac is selling for $4.56 in the United States. In the table below, fill in the implied exchange rate and then state whether the currency is overvalued or undervalued versus the U.S. dollar.

Answer 1

To find the implied exchange rate, divide the price of the Big Mac in the foreign country by its price in the United States. If the implied exchange rate is less than the actual exchange rate, the currency is undervalued.

Step-by-step explanation:

The implied exchange rate can be calculated by dividing the price of the Big Mac in the foreign country by its price in the United States. Let's assume the Big Mac price in the foreign country is $5.70. So, the implied exchange rate would be $5.70 / $4.56 = 1.25. The currency would be considered undervalued compared to the U.S. dollar as the implied exchange rate is less than the actual exchange rate.