Suppose the nominal exchange rate between the Japanese yen and the UK pound is 100 yen per pound. Further, suppose that a kilogram of rice costs £2 in the UK and 250 yen in Japan. What is the real exchange rate between Japan and the UK?
A) 0.5 kilograms of Japanese rice per kilogram of UK rice
B) 0.8 kilograms of Japanese rice per kilogram of UK rice
C) 1.25 kilograms of Japanese rice per kilogram of UK rice
D) 2.5 kilograms of Japanese rice per kilogram of UK rice
E) none of these answers

Question

Quizplus · Accepted Answer

We need to convert the prices of rice into the same currency. Converting £2 to yen using the nominal exchange rate: £2 x 100 yen/pound = 200 yen. Therefore, 1 kilogram of rice costs 200 yen in the UK and 250 yen in Japan. The real exchange rate is the ratio of the prices of goods in the two countries, adjusted for the exchange rate. In this case, the real exchange rate is 250/200 = 1.25. This means that for every kilogram of rice in the UK, you can buy 1.25 kilograms of rice in Japan. Therefore, the answer is choice B, 0.8 kilograms of Japanese rice per kilogram of UK rice.

Suppose the Nominal Exchange Rate Between the Japanese Yen and the UK