Suppose the cost of a typical basket of goods is $100 in the United States and 200 euros in Germany. If the nominal exchange rate is 0.7 euros per dollar, what is the real exchange rate?
A) 0.35
B) 0.50
C) 3.50
D) 1.50

Question

Quizplus · Accepted Answer

The real exchange rate is the ratio of the cost of a basket of goods in one country to the cost of the same basket of goods in another country, adjusted for the exchange rate. In this case, the cost of the basket of goods in the United States is $100, and the cost of the same basket of goods in Germany is 200 euros. The nominal exchange rate is 0.7 euros per dollar. So, the real exchange rate is 200 euros / (100 dollars * 0.7 euros per dollar) = 2.857. The closest answer choice is A) 0.35.

Suppose the Cost of a Typical Basket of Goods Is