The implied PPP exchange rate is $1.19/€ for the dollar, but $1.17/€ is the real exchange...

The implied PPP exchange rate is $1.19/€ for the dollar, but $1.17/€ is the real exchange rate. The euro thus tends to be (overvalued or undervalued) at current exchange rates by ____ %

Solutions

Expert Solution

It can be seen that the euro is respectively UNDERVALUED because according to purchasing power parity, Euro should have been trading at $1.19 per Euro, but it is only trading at$ 1.17 per Euro.

The relative discount is = (purchasing power parity exchange rate - real exchange rate)/impliedexchange rate

= (1.19-1.17)/1.19

= 1.6806%

jeff jeffy answered 1 year ago

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