1. The price of a Big Mac in the U.S. is $2.50; the price in France is 3.45 euros. The current official exchange rate (ExOfficial) is 1.15/$.

a. Use the Purchasing Power Parity (PPP) Theorem to determine whether $ is over or under valued against Euro? Show your calculations.

b. Use the DD$ & SS$ model to show your answer to part (a) above.

c. Given your answers to a & b above, explain the difference between the two exchange rates; ExOfficial & ExPPP, and the role of the Federal Reserve in maintaining the ExOfficial rate.

d. Given ExPPP and ExOfficial rates above, outline the pattern of a profitable trade (arbitrage) in Big Mac. Calculate per unit profit in Big Mac in Euro and Dollar. Show your calculations.

e. Calculate the real exchange rate? What does it mean?

Please answer all parts, thank you in advance!