Paf Is a Small Country

question 5

Essay

Paf is a small country. Its currency is the pif and the exchange rate with the U.S. dollar was 2 pifs
per dollar in 1980. The inflation indexes in 1980 were equal to 100 in the United States and in Paf. Twenty years later, the inflation indexes were equal to 400 in the United States and 200 in Paf. The current exchange rate is 0.9 pifs per dollar.
a. What should the current exchange rate be if PPP prevailed?
b. Is the Pif over/undervalued according to PPP?

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Definitions:

Corporation

A legal entity that is separate and distinct from its owners, who are known as shareholders.

Bonds

Long-term debt securities issued by corporations or governments to finance operations, projects, or other capital needs, paying periodic interest and the principal amount at maturity.

Stock

Stock represents ownership shares in a corporation, giving holders a claim on part of the company's assets and earnings.

Bond Payable

A recorded obligation indicating a company must repay a borrowed sum at a set interest rate by a specified date.