The price for Big Mac in the US is $4.00 and the price in EU area is Euro 3.2. Calculate the PPP rate based on these Big Mac prices (direct quotation). If the actual market FX rate is $1.12/euro, what is your evaluation about the value of euro against US in the market? And what would be your prediction about the euro?

$0.85/euro under valued; appreciation of euro

$1.25/euro ; under valued; appreciation of euro

$0.85/euro over valued ; depreciation of euro

$1.27/euro: over valued ; depreciation of euro