Assume, the current nominal exchange rate is 25 MXN USD According to Purchasing Power Parity (PPP), the exchange rate should be 20 MXN USD Questions 1) Is the USD over or undervalued By how much 2) What is the real exchange rate between the US and Mexico, that is, how many US cookies (goods) does i...

1 The USD is overvalued by 5 MXNUSD 2520 2 To get one M ...

Assume, the current nominal exchange rate is 25 MXN/USD. According to Purchasing Power Parity (PPP), the exchange

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Assume, the current nominal exchange rate is 25 MXN/USD. According to Purchasing Power Parity (PPP), the exchange rate should be 20 MXN/USD.

Questions:

1) Is the USD over- or undervalued? By how much?
2) What is the real exchange rate between the US and Mexico, that is, how many US "cookies" (goods) does it take to get a Mexican "cookie"?
3) What adjustment might you expect to happen over time? Discuss two alternative adjustments and provide quantitative answers if possible?