If a U.S. dollar purchases 4 Argentinean pesos, and a gallon of milk costs $3 in the U.S. and 6 pesos in Argentina what is the real exchange rate?
A)2 gallons of Argentinean milk/1 gallon of U.S.milk
B)3 gallons of Argentinean milk/2 gallon of U.S.milk
C)2 gallons of Argentinean milk/3 gallon of U.S.milk
D)1 gallons of Argentinean milk/2 gallon of U.S.milk

Question

Quizplus · Accepted Answer

The real exchange rate can be calculated by comparing the purchasing power of two currencies for a given product. In this case, $3 in the U.S. buys 1 gallon of milk, while in Argentina, 6 pesos buy 1 gallon of milk. Given the exchange rate of 1 U.S. dollar = 4 Argentinean pesos, $3 converts to 12 pesos. With 12 pesos, you can buy 2 gallons of milk in Argentina (since 6 pesos = 1 gallon). Therefore, the real exchange rate is 2 gallons of Argentinean milk for every 1 gallon of U.S. milk.

If a US Dollar Purchases 4 Argentinean Pesos, and a Gallon of Gallon