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Unformatted text preview: Fin536 Exercises 4 Chapter 7 Parity Conditions 1 1. (Absolute PPP) A Big Mac costs 2.8 in Europe , while it costs $3.5 in the U.S. The actual market exchange rate is S($/)=1.45. a. Compute the implied exchange rate by the Big Mac. b. Compute the real (effective) exchange rate implied by the Big Mac c. Is the Euro over-valued or under-valued compared to the implied rate by the Big Mac 2. (Exchange rate pass-through) The price of a European car is 10000. The current exchange rate is S($/)=1.46. a. Compute the price of the car in the U.S. b. If the U.S. dollar depreciates by 20% against the Euro, what is the price of the car in the U.S. with 100% pass-through? c. If the price of the car is actually $16,500, compute the degree of pass-through. 3. (Relative PPP) The Argentine peso was fixed through a currency board at Ps1.00/$ throughout the 1990s. In January 2002 the Argentine peso was floated. On January 29, 2003 it was trading at Ps3.20/$. During that one year period Argentina's inflation rate was 29, 2003 it was trading at Ps3....
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