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Assume, the current nominal exchange rate is 25 MXN/USD. According to Purchasing Power Parity (PPP), the exchange rate should be 20 MXN/USD. Questions: Is the

Assume, the current nominal exchange rate is 25 MXN/USD. According to Purchasing Power Parity (PPP), the exchange rate should be 20 MXN/USD.

Questions:

Is the USD over- or undervalued? By how much?
What is the real exchange rate between the US and Mexico, that is, how many US "cookies" (goods) does it take to get a Mexican "cookie"?
What adjustment might you expect to happen over time? Discuss two alternative adjustments and provide quantitative answers if possible.

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