Tall Lattés and the Real Exchange Rate between the Euro and the Dollar. According to The Economist, in early 2004 the average price of a tall latté in Starbucks in the United States was $2.80. In the...

Tall Lattés and the Real Exchange Rate between the Euro and the Dollar. According to The Economist, in early 2004 the average price of a tall latté in Starbucks in the United States was $2.80. In the countries that use the euro, the average price was 2.93 euros. Because the exchange rate at this time was 0.79 euro per dollar, the dollar price of lattés in the euro area was $3.70. (Related to Application 1 on page 418.)

a. At what exchange rate between the dollar and the euro would a latté cost the same in the euro area as it did in the United States?

b. Does this calculation suggest that the euro is “too high” or “too low” relative to the dollar?