Question
2. It is February 2017. A Big Mac costs CZK 80 in the Czech Republic, while it costs USD 4.8 in the U.S. The
2. It is February 2017. A Big Mac costs CZK 80 in the Czech Republic, while it costs USD 4.8 in the U.S. The spot rate is 25 CZK/USD (CZK Czech Koruna). (a) According to PPP, what should be the USD/CZK exchange rate in February 2017? (b) Take the USD as the domestic currency. Calculate the real exchange rate, Rt. What is the over/under- valuation of the CZK relative to the USD? (c) According to the Rt, which country is more efficient? (d) The GDP per capita in the Czech Republic is CZK 440,000. Translate the GDP per capita in CZK to (nominal) USD and to PPP USD prices. (e) Suppose in March 2017, the price of the Big Mac increases to CZK 88 in the Czech Republic, while it decreases to 4.56 in the U.S. According to the linearized version of PPP, what should the USD/CZK exchange rate be in March 2017? (f) Assume that in March 2017 the exchange rate is. 045 USD/CZK. Generate a trading signal based on PPP.
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