Refer to Table 19-1. Fill in the missing values in the above ...

[michelleunicorn]

Refer to Table 19-1. Fill in the missing values in the above table. Assume the Big Mac is selling for 4.79 in the United States. Explain whether the U.S.
 
  dollar is overvalued or undervalued relative to each of the other currencies and predict what will happen in the future to each exchange rate.

Question 2

In conducting monetary policy, how has the Federal Reserve enhanced its credibility?
 
  A) by revealing the Fed's target for the federal funds rate
  B) by marketing and increased expenditure on advertising
  C) by not following through with changes it has announced
  D) by keeping the minutes of the open market committee meetings confidential

[kswal303]

Answer to Question 1

To calculate the implied exchange rate, divide the foreign currency price of a Big Mac by the U.S. price.

Country

Big Mac Price

Implied Exchange Rate

Actual Exchange Rate
Denmark 34.59 kroner 7.22 kroner per dollar 6.81 kroner per dollar
Peru 10.0 new sols 2.09 sols per dollar 3.18 new sols per dollar
Sweden 43.7 kronor 9.12 kronor per dollar 8.52 kronor per dollar
Turkey 10.25 lire 2.14 lire per dollar 2.65 lire per dollar

The U.S. dollar is overvalued if the actual exchange rate is greater than the implied exchange rate, and undervalued if the actual exchange rate is less than the implied exchange rate. In this case, the U.S. dollar is overvalued against the Peruvian new sol and the Turkish lira, and it is undervalued against the Danish krone and Swedish krona. Overvaluation of the U.S. dollar would lead us to predict that the value of the dollar would fall in the future relative to the new sol and the lira. Undervaluation of the U.S. dollar would lead us to predict that the dollar's value would rise in the future relative to the krone and the krona.

Answer to Question 2

A

[michelleunicorn]

Gracias!

[bigcheese9]

Excellent