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3. (a) Define real exchange rate. (b) If the price levels (indices) in Canada and the U.S. are 125 and 110 respectively, what is the

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3. (a) Define real exchange rate. (b) If the price levels (indices) in Canada and the U.S. are 125 and 110 respectively, what is the PPP rate for Canadian dollar? If prevailing spot rate is $0.8334/C$, what is the real exchange rate of Canadian dollar? Which currency is overvalued/undervalued in PPP terms? (15 points)

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