Question

If a bushel of wheat costs $6.40 in the US and costs 40 pesos in Mexico and the nominal exchange rate is 10 pesos per dollar, then the real exchange from the US perspective is 1.60. The US will... a. Import more bushels of wheat from Mexico b. Export more bushels of wheat to Mexicoc. No change in exports or importsd. None of these answers are correct

Answer 1

Answer:

a. Import more bushels of wheat from Mexico

Explanation:

When the real exchange rate is higher than one, a country is likely to import more, since goods are cheaper in the other country than locally. In this example, a bushel of wheat, in the US, costs $6.40, while in Mexico, the same product costs:

$P=40\ pesos *\frac{\ 1}{10\ pesos}\\ P=\ 4$

Therefore, the US will Import more bushels of wheat from Mexico.