If U.S. visitors to Mexico can buy more goods in Mexico than they can in the United States when they convert their dollars to pesos, is the dollar undervalued or overvalued? Explain.

Suppose that U.S. interest rates are 4 percent more than rates in the EU.

a.Would you expect the dollar to appreciate or depreciate against the euro, and by how much?

b.If, contrary to your expectations, the forward and spot rates are the same, which direction would you expect financial capital to flow? Why?