Sometimes, analysts use the price of specific products in different locations to compare currency valuation and purchasing power. For example, the Big Mac Index com- pares the purchasing power parity of many countries based on the price of a Big Mac. Locate the latest edi- tion of this index that is accessible. Identify the five countries (and their currencies) with the lowest pur- chasing power parity according to this classification. Which currencies, if any, are overvalued?

Exercise 2 You are given the following information. The current dollar-pound exchange rate is $2 per pound. A US basket that costs $100 would cost $120 in the UK. For the next year, the Fed is expected to keep US inflation at 2% and the Bank of England is expected to keep UK inflation at 3%. The speed of convergence to absolute PPP is 15% per year. Show Transcribed Text (c) How much is the dollar overvalued/undervalued?

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Consider the foreign exchange market. For each of the scenarios below, answer thefollowing questions: (1) Which curve moves? (2) In which direction does it move? (3)What happens to the nominal exchange rate in equilibrium (i.e., does the US Dollarappreciate or depreciate)?(a) Brazil places tariffs on US products, limiting imports from America.(b) The US becomes a much riskier place to invest because of widespread politicalunrest.(c) Firms in the UK become much more profitable than those in the US.(d) The global economy surges, sparking higher consumption everywhere in the world.(e) Japan’s central bank cuts interest rates in that country.(f) Mexico’s firms do a much better job of marketing their products to the UnitedStates.