0. 3. The Economists Big Mac Index attempts to measure the equilibrium exchange rate between two countries by comparing the price of a Big Mac in each country.

   1. a) (5 points) Explain the theory upon which the Economists methodology is based (i.e. why is this a useful way to estimate the exchange rate?)

   2. b) (2 points) If a Big Mac costs 3.19 in Britain and US$5.58 in the United States, what is the implied exchange rate?

   3. c) (3 points) If the actual exchange rate is 0.78/US$, is the British pound over-valued or under-valued? Explain.