I have gotten 2 different answres on Chegg so please help me figure out which is
ID: 1129403 • Letter: I
Question
I have gotten 2 different answres on Chegg so please help me figure out which is the actual correct one.
The last time The Economist checked, a Big Mac costs $5.30 in the US while it costs 16.9 Israeli Shekel (NSI) in Israel. If the actual exchange rate is 3.54 NSI/USD, then the Israeli Shekel is _____ relative to the (Big Mac) PPP. The Israeli Shekel should change by _______ percent so that we reach the Law of One Price (Purchasing Power Parity) for the Big Mac.
A. a. Undervalued; -9.9%
B. b. Undervalued; -11%
C. c. Overvalued; +9.9%
D. d. Overvalued; +11%
Explanation / Answer
The right answer is option A.
The actual exchange rate is 3.54 NSI/USD. So, 1 NSI is actually worth 1/3.54 USD = 0.2824 USD
According to the PPP, $5.30 is worth 16.9 NSI. So, 1 NSI should be worth 5.30/16.9 USD = 0.3136
Therefore, NSI is undervalued relative to the (Big Mac) PPP.
The NSI needs to change from 3.54 NSI/USD to 16.9/5.3 NSI/USD i.e. from 3.54 NSI/USD to 3.188 NSI/USD
So, the % change is = (3.54 - 3.188)/3.54 * 100 = 0.352/3.54 * 100 = 0.0994 * 100 = 9.94% = 9.9%
Also, the sign should be negative ad it is a negative change.
So, right answer is A, undervalued, -9.9%