1. According to the Big Mac Index, the implied PPP exchange rate is Mexican Peso 8.58/$1 but the actual exchange rate is Peso 11.80/$1. Thus, at current exchange rates the peso appears to be ________ by ________.
a) undervalued; approximately 21%
b) overvalued; approximately 27%
c) undervalued; approximately 27%
d) overvalued; approximately 21%
2. One year ago the spot rate of U.S. dollars for Canadian dollars was USD1/CAD1. Since that time the rate of inflation in the U.S. has been 4% greater than that in Canada. Based on the theory of Relative PPP, the current spot exchange rate of U.S. dollars for Canadian dollars should be approximately ________.
a) USD 0.96/CAD 1
b) USD 1.04/CAD 1
c) USD1/CAD1
d) Relative PPP provides no guide for this type of question.