Suppose a year ago the exchange rate between Mexican pesos and dollars was 13.5 pesos per dollar, and that according to relative PPP the exchange rate was in equilibrium
Furthermore, assume that since then, Mexican inflation has been 12 percent while the U.S. inflation has been 3 percent. If according to relative PPP the peso is now said to be overvalued, what is a possible exchange rate consistent with this assertion? A) 13.5 pesos per dollar.
B) 14.72 pesos per dollar.
C) 15 pesos per dollar.
D) 20 pesos per dollar.
A
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