Reference no: EM13980682
If the price level in Canada is C$18,500, the price level in France is €13,095, and the spot exchange rate is C$1.25/€, please answer the following questions:
-What is the internal purchasing power of the Canadian dollar? (Hint: it may be best to calculate the purchasing power of C$10,000 first and divide by the price level of C$18,500 to obtain the number of consumption bundles for C$18,500).
-What is the internal purchasing power of the euro in France? (Hint: it may be best to calculate the purchasing power of €10,000 first and divide by the price level of €13,095 to obtain the number of consumption bundles for €13,095).
-What is the implied exchange rate of C$/€ that satisfies absolute PPP?
-Is the euro overvalued or undervalued relative to the Canadian dollar? Explain the reasoning for your answer.
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