Question

1. CLP/USD .0013 in nominal currency exchange rate terms. A Big Mac costs $3.99 in the U.S. and 4,000 Chilean Pesos in Chile. How much would I expect to pay for the same Big Mac in the U.S. Also, which currency is overvalued? Lastly, where am I better off purchasing the Big Mac?

   	I.	I would expect to pay $3.99 for the Big Mac in the U.S. The Chilean Peso is overvalued. I am better off purchasing the Big Mac in Chile..
   	II.	I would expect to pay $5.20 for the Big Mac in the U.S. The Chilean Peso is overvalued. I am better off purchasing the Big Mac in the U.S.
   	III.	I would expect to pay $3.99 for the Big Mac in the U.S. The Chilean Peso is overvalued. I am better off purchasing the Big Mac in the U.S.
   	IV.	I would expect to pay $5.20 for the Big Mac in the U.S. The Chilean Peso is overvalued. I am better off purchasing the Big Mac in Chile.

QUESTION 6

1. EUR/USD 1.21 in nominal currency exchange rate terms. The same model of Nike shoes costs USD $130 in the U.S. and 185 Euros in Europe. Please select the correct answer.

   	I.	The Euro is overvalued. I am better off purchasing the same Nike shoes in Europe.
   	II.	The Euro is overvalued. I am better off purchasing the same Nike shoes in the U.S.
   	III.	The Euro is underrvalued. I am better off purchasing the same Nike shoes in the U.S.
   	IV.	The Euro is overvalued. I am better off purchasing the same Nike shoes in Europe.

Answer 1

Question 5:

Current Exchange rate = USD 0.0013 / CLP

Big Mac Cost in U.S = $3.99

Big Mac Cost in Chile = 4,000 CLP

= 4,000 CLP * USD 0.0013 / CLP

= $5.2

III. I would expect to pay $3.99 for the Big Mac in the U.S. The Chilean Peso is overvalued. I am better off purchasing the Big Mac in the U.S.

Option III is correct

Question 6:

Current Exchange rate = 1.21 USD / EUR

Nike shoes cost in U.S. = $130

Nike shoes cost in Europe = 185 EUROS

= 185 EUR * 1.21 USD / EUR

= USD 223.85

III. The Euro is underrvalued. I am better off purchasing the same Nike shoes in the U.S.

Option III is correct