Imagine that a bushel of wheat costs $3.20 in the United States and costs 20 pesos in Mexico.If the nominal exchange rate is 10 pesos per dollar,the real exchange rate is
A)1.60
B)1.25
C).625
D)None of the above is correct.

Question

Quizplus · Accepted Answer

The real exchange rate is calculated by dividing the nominal exchange rate by the ratio of foreign price to domestic price.

Real exchange rate = nominal exchange rate x (foreign price / domestic price)

In this case,

Real exchange rate = 10 pesos per dollar x (20 pesos / $3.20)

Real exchange rate = 10 x 6.25

Real exchange rate = 62.5

Therefore, the real exchange rate is 1 / 62.5 or 0.016 or 1.60.

Hence, the best choice is A) 1.60.

Imagine That a Bushel of Wheat Costs $3