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Homework answers / question archive / 1 You are given the following informatiu Nominal effective AUD/USD exchange rate index at end of 2019 98

1 You are given the following informatiu Nominal effective AUD/USD exchange rate index at end of 2019 98

Finance

1 You are given the following informatiu Nominal effective AUD/USD exchange rate index at end of 2019 98.15 (based on 100.00 at end of 1999) Australian CPI at end of 2019(based on 100 at end of 1999) 100 US CPI at end of 2019 (based on 100 at end of 1999) 100 Calculate the real effective AUD/USD exchange rate index at end of 2019. 91.64 89.33 88.13 98.15

2 

Assume the price of a Big Mac in the U.S. is $7.99 and the price in Turkey is 39 Turkish Lira (TRY). Thus, according to PPP and the Law of One Price, at the current exchange rate the TRY is: Lütfen birini seçin: a. undervalued b. Insufficient information to answer this question c. overvalued d. correctly valued

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1 Real effective exchange rate will be calculated using CPI of both the countries-

= Spot rate*( CPI of country A/CPI of country B)

= 98.15(100/100)

= 98.15

AUD/USD = $98.15

Correct answer is option (d) $98.15

2 

Answer: Option (a) Undervalued

Current Exchange Rate: 1 USD = 7.33 TRY

Price of Big Mac in US = $ 7.99

If Purchasing Parity Theorem prevails, The Price of Big Mac in Turkey should be the price equivalent TRY for price in US $.

Fair Price should be = $ 7.99 * 7.33 TRY/$ = 58.56 TRY.

But, the actual price in Turkey is 39 TRY.

Implied Exchange Rate = Price in TRY/ Price in $ = 39 TRY/7.99$ = 4.88 TRY/$

As the TRY required for purchasing Big Mac is lessthan TRY required as computed under Law of one price, we can understand that at current exchange rate TRY is undervalued.

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