You notice that the price of a Big Mac in Argentina is 40 pe

You notice that the price of a Big Mac in Argentina is 40 pesos. Here in the USA the price is $4.00.

a. What is the purchasing power parity exchange rate between Argentina and the USA?

b. If the actual exchange rate is 15 pesos to the $ is the Argentine currency undervalued or overvalued.

c. Assume that inflation in Argentina during the next year is expected to be 15% and that inflation in the USA is expected to be around zero. What would you expect to happen to the $/peso exchange rate?

Solution

a. here $4 is equals to 40 pesos. means that one dollar is equals to 10 pesos.

b. if the actual exchange rate is 15 pesos per dollar, then the Argentine currecny is undervalued.

c. the peso value is going to decline even further. to buy one dollar they need to pay atleast 17.25 pesos. the peso value is declining.