International Finance Theory and Policy
by Steven M. Suranovic

Finance 30

Finance 30

Finance Questions 30 2-2

1. Use the information in the table below to answer the following questions.

 
Big Mac Price

Exchange Rate
(6/4/98)
United States
$2.53
--
South Korea
won 2600
1475 won/$
Israel
shekel 12.50
3.70 sh/$
Poland
zloty 5.30
3.46 zl/$

 

A. Calculate whether the won, the shekel, and the zloty are overvalued or undervalued with respect to the US dollar in terms of purchases of Big Macs. Explain what it means to be over or undervalued.

B. What would the exchange rates have to be in order equalize big Mac prices between South Korea and the US, Israel and the US, and Poland and the US?

C. If in the long run the exchange rate moves to satisfy Big Mac PPP, will the won, shekel and zloty, respectively, appreciate or depreciate in terms of dollars? Explain the logic.

International Finance Theory and Policy - Chapter 30: Last Updated on 1/6/08