Question

Consider a basket of consumer goods. The basket of goods costs $72.00 in the United States. The same basket of goods costs 224.00 pesos in Mexico. The nominal exchange rate is 14.00 pesos per dollar. The real exchange rate between U.S. and Mexican baskets of goods is_____________ baskets of Mexican goods per basket of U.S. goods. Now suppose the nominal exchange rate increases from 14.00 pesos per dollar to 28.00 pesos per dollar. If the prices of the basket remain unchanged in both the United States and Mexico, the real exchange rate between the U.S. and Mexican baskets of goods will __________to baskets of Mexican goods per basket of U.S. goods.

Answer 1

Answer:

4.5 and 9

Explanation:

Basket of goods in US=$72.00

Basket of goods in Mexico=224.00 pesos

Nominal exchange rate= 14.00 pesos per dollar

Real Exchange Rate = (Nominal Exchange Rate x Price of the Foreign Basket) / Price of the Domestic Basket

=(14.00 pesos ×$72.00) / 224.00 pesos

=1,008/224.00

=4.5

Nominal exchange rate increased from 14.00pesos per dollar to 28.00 pesos per dollar

Real Exchange Rate = (Nominal Exchange Rate x Price of the Foreign Basket) / Price of the Domestic Basket

=(28.00×$72.00)/224.00 pesos

=2,016/224

=9

Consider a basket of consumer goods. The basket of goods costs $72.00 in the United States. The same basket of goods costs 224.00 pesos in Mexico. The nominal exchange rate is 14.00 pesos per dollar. The real exchange rate between U.S. and Mexican baskets of goods is 4.5 baskets of Mexican goods per basket of U.S. goods. Now suppose the nominal exchange rate increases from 14.00 pesos per dollar to 28.00 pesos per dollar. If the prices of the basket remain unchanged in both the United States and Mexico, the real exchange rate between the U.S. and Mexican baskets of goods will 9 to baskets of Mexican goods per basket of U.S. goods.