Question 1 (a) (b) Explain the difference between nominal exchange rate and real exchange rate As mentioned in class, the Big Mac Index is a numerical tool for assessing disparities in consumer purchasing power between countries. Suppose that the Big Mac costs 7.50 Canadian dollars in Canada and 5.50 US dollars in the US. Suppose that the nominal exchange rate is 0.8 US dollars per Canadian dollar. (i) (ii) (iii) Calculate the price of the Big Mac in Canada in US dollars and compare with the price of the Big Mac in the US in US dollars. Is the Big Mac cheaper in Canada or the US? Is this consistent with the Law of One Price? As mentioned in class, the Big Mac Index could be used as an indicator of which currency (Canadian or US) is undervalued. What are the advantages and limitations of having an undervalued currency?