Question

: If U.S. visitors to Mexico can buy more goods in Mexico than they can in the United States when they convert their dollars to pesos, is the dollar undervalued or overvalued? Explain.

Answer 1

Answer:

The dollar is overvalued.

Explanation:

An overvalued exchange rate implies that a countries currency is too high for the state of the economy. An overvalued exchange rate means that the countries exports will be relatively expensive and imports cheaper. An overvalued exchange rate tends to depress domestic demand and encourage spending on imports.