Question: Real exchange rate and Purchasing power (a) Explain the difference between nominal exchange rate and real exchange rate (b) As mentioned in class, the Big

Real exchange rate and Purchasing power

(a) Explain the difference between nominal exchange rate and real exchange rate

(b) 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 1.2 Canadian dollars to 1 US dollar.

(i) Calculate the real exchange rate.

(ii) Is the Canadian dollar undervalued or overvalued against the US dollar? Explain.

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