1. Suppose that a Big Mac costs $5.79 in the US, and CHF 6.5 in Switzerland.
You are told that the exchange rate between $ and CHF is CHF=$0.5
From what you know about PPP theory and Law of One Price, the swiss franc is...
Answers:
A.overvalued! It should be about 5.79/6.50
B.undervalued! It should be about 6.50/5.79
C.undervalued! It should be about 5.79/6.50
D.overvalued! It should be about 6.50/5.79
2.Suppose that a Big Mac costs $5.79 in the US, and Yuan 20 in China.
You are told that the exchange rate between $ and Yuan is Yuan=$2
From what you know about PPP theory and Law of One Price, the Yuan is...
Answers:
A.undervalued! It should be priced at 20/5.79
B.overvalued! It should be priced at 5.79/20
C.overvalued! It should be priced at 20/5.79
D.undervalued! It should be priced at 5.79/20