Question: A Big Mac costs 3.0 in Europe , while it costs $4.0 in the U.S. The actual market exchange rate is S($/)=1.25. Then . a.

A Big Mac costs 3.0 in Europe , while it costs $4.0 in the U.S. The actual market exchange rate is S($/)=1.25. Then

. a. real (effective) exchange rate implied by the Big Mac is 1 and the euro is at parity.

b. real (effective) exchange rate implied by the Big Mac is 0.75 and the euro is under-valued by 25%.

c. real (effective) exchange rate implied by the Big Mac is 1.07 and the euro is over-valued by 7%.

d. real (effective) exchange rate implied by the Big Mac is 0.94 and the euro is under-valued by 6%.

e. real (effective) exchange rate implied by the Big Mac is 1.33 and the euro is over-valued by 33%.

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