Question

Suppose the real exchange rate is 3/4 gallon of country A's gasoline per gallon of U.S. gasoline, a gallon of U.S. gasoline costs $3.00 U.S., and a gallon of gas in country A costs 6 units of their currency. What is the nominal exchange rate?
a. 3/2 units of country A's currency per dollar.
b. 8/3 units of country A's currency per dollar.
c. 3/8 of a unit of country A's currency per dollar.
d. None of the above is correct.

Answer 1

The nominal exchange rate (NER) is given by:

NER = RER × (foreign price / US price)
        = 3/4 × ( 6 / 3)
        = 3/2

In fact, with 1$ you can buy 1/3 of a US gallon, which corresponds to 1/4 of a foreigner gallon, which you would pay 3/2units.

Hence, the correct answer is a) 3/2 units of country A's currency per dollar.