If the exchange rate is 70 Bangladesh taka per dollar and a bushel of rice costs 200 taka in Bangladesh and $3 in the United States, then the real exchange rate is

Question

Quizplus · Accepted Answer

To calculate the real exchange rate we use the formula:

Real Exchange Rate = Nominal Exchange Rate x (Domestic Price Level/Foreign Price Level)

Therefore, the real exchange rate would be:

Real Exchange Rate = (70 Bangladeshi taka/$) x ($3/bushel)/(200 taka/bushel) = 1.05

Because the real exchange rate is greater than one, we know that the same good (in this case, rice) is cheaper in Bangladesh than in the United States, after adjusting for exchange rates. Therefore, arbitrageurs could profit by buying rice in Bangladesh and selling it in the United States. Hence, the correct answer is B.

If the Exchange Rate Is 70 Bangladesh Taka Per Dollar