Round all the numbers to 2nd decimal points. and fill in the blanks with the exact match of the options provided.
The Nominal Exchange Rate today is 0.75 British Pounds (GBP, £ ) per 1 US Dollar (USD, $ ). A Big Mac is sold for $ 3.99 in the US and £ 3.19 in the UK (write Down the Exchange Rates in terms of the domestic currency, USD).
a. According to the Prices of the Big Mac, the Real Exchange Rate is [Qa]
b. Do we have Purchasing Power Parity between US and UK in this case [Qb] (Yes or No)? Why (answer based on the Real Exchange Rate)?
c. Do we have an arbitrage opportunity in this situation [Qc] (Yes or No) (assuming transporting Big Mac across countries does not have any cost)?
d. If the Price of Big Mac in the UK doubled because of Brexit (the UK withdrawing from the European Union) and the Purchasing Power Parity holds, the new (Nominal) GBP-USD Exchange Rate is [Qd].
e. According to part d., fill in the correct answer:
US Dollar [Qe] (appreciates/depreciates); British Pounds [Qf] (appreciates/depreciates)