Suppose the real exchange rate is 1 litre of Canadian gasoline per 2 litres of U.S.gasoline,1 litre of U.S.gasoline costs $0.50 U.S.,and a litre of Canadian gas costs $1.30 Canadian.What is the nominal exchange rate?
A)0.38 U.S. dollars per Canadian dollar
B)0.65 U.S. dollars per Canadian dollar
C)0.77 U.S. dollars per Canadian dollar
D)1.30 U.S. dollars per Canadian dollar

Question

Quizplus · Accepted Answer

To find the nominal exchange rate, we need to find how much 1 Canadian dollar would be worth in U.S. dollars. We can start by finding the price of 1 litre of Canadian gasoline in U.S. dollars:

$1.30 CAD/L * 1 USD/1.27 CAD * 1 L/3.7854 gal * 2 gal U.S. gas/1 L Can. gas = $0.431 USD/L Can. gas

This tells us that 1 litre of Canadian gasoline is worth $0.431 USD. To find how many Canadian dollars we need to get 1 U.S. dollar, we can take the reciprocal:

1/0.431 = 2.32

So, the nominal exchange rate is 2.32 Canadian dollars per U.S. dollar, or 0.77 U.S. dollars per Canadian dollar (since 1 U.S. dollar is equal to 1/0.77 Canadian dollars). Therefore, the answer is C.

Suppose the Real Exchange Rate Is 1 Litre of Canadian