At the beginning of the year (January), the price index in Mexico was 210,000 MXN and the price index in the US was 12,000 USD. The USDMXN spot rate was 18.5.
A. Does Absolute PPP Hold? If no, is the USD overvalued or undervalued?
B. Assume that this year the inflation rate was 5% in Mexico and 1% in the US. The spot rate at the end of the year is USDMXN 19.40. Does Absolute PPP hold? Does (simplified) Relative PPP hold? C. (Continuing from B). Assume that the spot rate at the end of the year satisfies (non-simplified) Relative PPP. What was the real appreciation/depreciation of USD?