1. In July 2019, the price of a Big Mac in Great Britain was 3.29 pounds....
1. In July 2019, the price of a Big Mac in Great Britain was 3.29 pounds. The exchange rate between the British pound and US dollar was 0.80 pounds/dollar.
a. What would be the cost of a Big Mac in Great Britain in US dollars (convert the price in British pounds to US dollars)?
b. The current cost of a Big Mac in the US is $5.74. If the law of one price holds for the Big Mac in the United States and Great Britain, what would be the exchange rate between the pound and the dollar?
c. Compare the actual exchange rate between the pound and the dollar of 0.80 pounds/$1 to the exchange rate suggested by the law of one price in part b. Is the pound overvalued or undervalued according to our application of the law of one price?
Homework Answers
HI. Welcome to Chegg.
Price of Big Mac in Britain = $ 3.29.
Exchange rate between British pound and US dollar = 0.8 pounds/ dollars that is 1 $= 0.8 pounds. So 1 pound = $1.25
a. Cost of Big Mac in Great Britain in terms of dollars = 3.29x1.25 = $ 4.1125
b. Current cost of Big Mac in US dollar = $ 5.74 and also it is 3.29 pounds. So the exchange rate between pound and dollar is 5.74/3.29 = 0.57
c. The actual exchange rate is 0.80 and and it is 0.57 as per law of one price, so the pound is undervalued as per law of one price.
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