Suppose you reserve a hotel room in Madrid for $300 per night.When you check out,you are charged only $285 per night.Assuming that the price of the room in euros had not changed,and that the nominal exchange rate had been 0.8 (euros/$)when the reservation was made,the new nominal exchange rate is ________.

Question

Quizplus · Accepted Answer

To find the new nominal exchange rate, we need to use the concept of purchasing power parity (PPP). PPP suggests that the exchange rate between two currencies should equal the ratio of the price level of a basket of goods in each country. In this case, the basket of goods is the hotel room.

Using PPP, we can set up the following equation:

Price of hotel room in Madrid / Exchange rate = Price of hotel room in dollars

$300 / 0.8 = 375 euros

Since the price actually charged was 285 euros, we can solve for the new exchange rate:

Price of hotel room in Madrid / Exchange rate = Price of hotel room in dollars

$285 / x = 375 euros

x = 375 / 285 = 1.316

Therefore, the new nominal exchange rate is:

1 euro / $1.316 ≈ 0.76 (rounded to two decimal places)

So, the best choice is A.

Suppose You Reserve a Hotel Room in Madrid for $300