Problem Set 6 Key

We can see from the below chart that only the euro is

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Unformatted text preview: d is undervalued if a USD buys more than it “ought” to. The amount the foreign currency needs to depreciate is the difference between the par and actual exchange rates divided by the actual exchange rate. We can see from the below chart that only the Euro is overvalued, and it needs to depreciate by about 30%. The other world currencies considered in this example are undervalued and all need to appreciate relative to the USD. The Big Mac Index Country United States Euro Japan Mexico South Africa Russia Indonesia China Price in Local Exchange Rate (per USD) Big Mac Price in USD Par Exchange Rate Over/Under Appre/Depre 3.58 3.35 321 32.7 1 0.72 90.66 12.76 3.58 4.62 3.54 2.56 1 0.93575419 89.66480447 9.134078212 N/A Overvalued Undervalued Undervalued N/A -0.299658597 0.010977228 0.28416315 18.3 71.5 21060 12.49 7.5 29.9 9238 6.83 2.44 2.39 2.28 1.83 5.111731844 19.97206704 5882.681564 3.488826816 Undervalued Undervalued Undervalued Undervalued 0.318435754 0.332037892 0.363208317 0.489190803 2. Question 2 on Page 530 of Jones (Chapter 19). Net exports and the IS curve: Consider the way in which net exports depend on the real exchange rate. Does the dependence of net exports on the real exchange rate make the IS curve steeper or flatter? What is...
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This note was uploaded on 11/16/2013 for the course ECON 122A taught by Professor Nordhaus during the Fall '12 term at Yale.

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