Suppose the cost of a typical basket of goods is 100dollar in the United States and 800 pesos in Mexico. If the nominal exchange rate is 25 pesos per dollar, what is the real exchange rate?
A) 0.33
B) 1.33
C) 1.50
D) 3.13

Question

Quizplus · Accepted Answer

The real exchange rate is calculated as (Nominal Exchange Rate * Price of Basket in Foreign Country) / Price of Basket in Home Country = (25 pesos/dollar * 800 pesos) / 100 dollars = 20000 pesos / 100 dollars = 200 pesos/dollar, which is equivalent to 200/64 = 3.13 when considering the given options.

Suppose the Cost of a Typical Basket of Goods Is