Question

1. Fred, an American businessman based in the U.S., imports fruit from Malaysia. He reads that the U.S. Federal Reserve Bank will raise interest rates two weeks from now. Based on the relationship between interest rates and currency values, is Fred better off importing as much fruit from Malaysia now or should he wait until the U.S. Fed actually raises interest rates before he imports more fruit from Malaysia? Explain your answer.

2. MXN is the symbol for the Mexican Peso. MXN/USD .05. A 2020 Toyota Supra costs $49,000 in the U.S. and 1,200,000 Mexican Pesos in Mexico. Based on this information, please answer the following questions.

1. What is USD/MXP in real currency exchange rate terms?
2. Is the USD over or undervalued?
3. Where am I better off buying the Toyota Supra? In Mexico or in the U.S.?
4. Based on the official/nominal MXN/USD currency exchange rate, what would I expect to pay for the Supra in Mexico?
5. Based on the real cost of the same car in both countries, if Purchasing Power Parity (PPP) were to hold true, what would USD/MXN be?
6. Based on the nominal currency exchange rate, if Purchasing Power Parity (PPP) were to hold true, what would I expect to pay for the Supra in the U.S.

Please explain how you solved each letter for #2. Thank you!

Answer 1

As requested by the student, solution of each letter of the part 2 are as follows: