Question

A good in the U.S. costs $20. The same good costs 150 pesos in Mexico. If the nominal exchange rate is 10 pesos per dollar, what is the real exchange rate? a. 4/3 so the good is more expensive in the U.S. b. 3/4 so the good is more expensive in the U.S. c. 3/4 so the good is more expensive in Mexico d. 4/3 so the good is more expensive in Mexico

Answer 1

Answer:

a. 4/3 so the good is more expensive in the U.S

Explanation:

Nominal Exchange rate 1 $ = 10 pesos

Nominal exchange rate is the exchange rate which does not consider the impact of inflation. On the other hand, real exchange rate is calculated after adjusting inflation.

Real Exchange rate = Nominal exchange rate × $\frac{Price\ of\ good\ in\ U.S}{Price\ of\ good\ in\ Mexico}$

Real Exchange rate = 10 × 20/150 = 4/3

Since the exchange rate is per USD, this means the good is more expensive in the U.S.