Asked on 7 Aug 2018

1. In January 2017, the price of a Big Mac in Egypt was 31.37 Egyptian pounds. The exchange rate between the Egyptian pound and US dollar was 17.89 pounds/dollar.

a. What would be the cost of a Big Mac in Egypt in US dollars (convert the price in Egyptian pounds to US dollars)?
b. The current cost of a Big Mac in the US is $5.30. If the law of one price holds for the Big Mac in the United States and Egypt, what would be the exchange rate between the Egyptian pound and the dollar?
c. Compare the actual exchange rate between the pound and the dollar of 17.89 pounds/$1 to the exchange rate suggested by the law of one price in part b. Is the pound overvalued or undervalued according to our application of the law of one price?

Answered on 7 Aug 2018

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