Question

1) The price of a Big Mac in the U.S. is $3.45 and the price in Mexico is Peso 27.0. What is the implied PPP of the Peso per dollar?

A) Peso 8.50/$1

B) Peso 10.8/$1

C) Peso 11.76/$1

D) None of the above

2) Assume the implied PPP rate of exchange of Mexican Pesos per U.S. dollar is 8.50 according to the Big Mac Index. Further, assume the current exchange rate is Peso 7.80/$1. Thus, according to PPP and the Law of One Price, at the current exchange rate the peso is:

A) overvalued.

B) undervalued.

C) correctly valued.

D) There is not enough information to answer this question.

3) According to the Big Mac Index, the implied PPP exchange rate is Mexican peso 8.50/$1 but the actual exchange rate is peso 10.80/$1. Thus, at current exchange rates the peso appears to be ________ by ________.

A) overvalued; approximately 21%

B) overvalued; approximately 27%

C) undervalued; approximately 21%

D) undervalued; approximately 27%

E) None of the Above