Suppose that a compact disc (CD) costs $15 in the United States and 13 in the United Kingdom. The nominal exchange rate is $1.9382 per pound.

1. Calculate the real exchange rate between the United Kingdom and the United States in terms of CDs. [Round off to the second decimal place.]

2. Based on your answer to 2.1 state whether the United Kingdom pound is overvalued or undervalued relative to the dollar.

3. An arbitrageur could make money by buying CDs in 2.3.1___ and selling them in 2.3.2 _____. [Please write down the question number and correct alternative from those in parentheses.]