Question

Consider the following conditions​: follows The exchange rate between the U.S. dollar and the British pound is pound.equals​$1. follows The U.S. price level is 100 and the British price level is 105. The real exchange rate equals nothing. ​(Enter your response rounded to two decimal​ places.)

Answer 1

Answer:

The real exchange rate equals

1.05.

Explanation:

To calculate the real exchange rate use the formula:

R = (E x P*)/P

Where:

R: real exchange rate =?

E: nominal exchange rate =$1

P*: foreign price level =105

P: domestic price level =100

R= (1 x 105) / 100 =1.07 rounded to two decimal​ places.

Remember, the real exchange rate is only a measure of the price of foreign goods relative to the price of domestic goods of a country.

Answer 2

Answer:

1.05 real exchange rate between the US dollar and the British pound.

Explanation:

The equation for calculating real exchange rate is:

RER = eP* / P

• e = nominal dollar-pound exchange rate
• P* = average price of a good in Great Britain
• P = average price of a good in the US

RER = (1 x 105) / 100 = 105 / 100 = 1.05 real exchange rate between the US dollar and the British pound.

This means that the British pound is overvalued compared to the US dollar.