Question: (15 points) 2. The PPP hypothesis and the Big Mac Inder The Economist reported on January 15, 2021, that the local prices of Big Macs

(15 points) 2. The PPP hypothesis and the Big Mac Inder

(15 points) 2. The PPP hypothesis and the Big Mac Inder The Economist reported on January 15, 2021, that the local prices of Big Macs and US dollars and exchange rates on January 1, 2021 were: Big Mac Price Exchange Rate Denmark 30.0 DKK 6.121 DKK/USD Sweden 52.88 SEK 8.295 SEK/USD United States 5.66 USD 1.000 USD/USD (a) What were the USD prices of a Big Mac in Denmark and Sweden? (b) How does the ratio of Big Mac prices compare to the real exchange rate? (c) What DKK/USD and SEK/USD exchange rates would equate the dollar prices of Big Macs in Denmark and Sweden to the US price? (d) According to The Economist and their methodology, how much were the DKK and the SEK "over-" or "undervalued" relative to the US dollar? (e) Explain briefly how the purchasing-power-parity hypothesis (like the uncovered- interest-rate-parity hypothesis) differs fundamentally from the no-arbitrage relationships we covered in class. (f) In the attached .xlsx-file please find a sheet with Big Mac prices for Sweden and the United States and SEK/USD exchange rates extracted from The Economist's Big Mac Index GitHub site. 1,2 The column prediction" contains predicted changes in the SEK/USD exchange rate computed as in (d). The column "actual" contains the actual changes in the SEK/USD in the following year. Regress actual changes in the SEK/USD exchange rate on the predicted change in the exchange rate. Report the estimated coefficient, its t-value, and the RP. Comment briefly on the results. (15 points) 2. The PPP hypothesis and the Big Mac Inder The Economist reported on January 15, 2021, that the local prices of Big Macs and US dollars and exchange rates on January 1, 2021 were: Big Mac Price Exchange Rate Denmark 30.0 DKK 6.121 DKK/USD Sweden 52.88 SEK 8.295 SEK/USD United States 5.66 USD 1.000 USD/USD (a) What were the USD prices of a Big Mac in Denmark and Sweden? (b) How does the ratio of Big Mac prices compare to the real exchange rate? (c) What DKK/USD and SEK/USD exchange rates would equate the dollar prices of Big Macs in Denmark and Sweden to the US price? (d) According to The Economist and their methodology, how much were the DKK and the SEK "over-" or "undervalued" relative to the US dollar? (e) Explain briefly how the purchasing-power-parity hypothesis (like the uncovered- interest-rate-parity hypothesis) differs fundamentally from the no-arbitrage relationships we covered in class. (f) In the attached .xlsx-file please find a sheet with Big Mac prices for Sweden and the United States and SEK/USD exchange rates extracted from The Economist's Big Mac Index GitHub site. 1,2 The column prediction" contains predicted changes in the SEK/USD exchange rate computed as in (d). The column "actual" contains the actual changes in the SEK/USD in the following year. Regress actual changes in the SEK/USD exchange rate on the predicted change in the exchange rate. Report the estimated coefficient, its t-value, and the RP. Comment briefly on the results

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