Question

The following table shows prices of Big Macs, implied exchange rates, and actual exchange rates. Indicate which countries listed in the table have undervalued currencies versus the U.S. dollar and which have overvalued currencies.

Answer 1

An undervalued currency is one that is priced lower than its true value compared to the U.S. dollar, while an overvalued currency is priced higher. To determine this, we need to compare the implied and actual exchange rates.

Step-by-step explanation:

In the context of exchange rates, an undervalued currency refers to a situation where a country's currency is priced lower than its true value compared to the U.S. dollar. On the other hand, an overvalued currency is when a country's currency is priced higher than its true value compared to the U.S. dollar. To determine whether a currency is undervalued or overvalued, we need to consider the relationship between the implied exchange rates and the actual exchange rates.

If the implied exchange rate is lower than the actual exchange rate, it suggests that the currency is undervalued. This means that the currency is relatively cheaper compared to the U.S. dollar, making the country's goods and services more attractive in international markets. In the table provided, we need to compare the implied exchange rates with the actual exchange rates to identify undervalued and overvalued currencies.

Example:
If the implied exchange rate for Country A is 1.20 and the actual exchange rate is 1.10, it indicates that the currency of Country A is undervalued, as 1.20 is higher than 1.10.