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 U.S. dollar is over valued

Explanation:

In order to understand if a currency is over valued or under valued you have to first look at the goods that is able to be purchased at conversion. So for instance when the U.S. visitor goes to Mexico, they find that they are able to purchase more goods or that they are cheaper in Mexico.  This is an indication of an over valued currency. Additionally, the Mexican peso is undervalued in relation to the U.S. dollar since a Mexican tourist will have find that the conversion will get them less money and goods and services will be more expensive for them.