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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The Answer of 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?

Paf Is a Small Country