Suppose the domestic price of a gallon of milk is $3.75 in the United States, and a similar gallon of milk costs 45 yuan in China. If the nominal exchange rate is 7.08 yuan per U.S. dollar, then what is the real exchange rate?

Question

Quizplus · Accepted Answer

The real exchange rate is calculated as (foreign price/nominal exchange rate)/domestic price. Plugging in the values, we get:
Real exchange rate = (45/7.08)/3.75
Real exchange rate = 0.59
Therefore, the answer is D) 0.59

Suppose the Domestic Price of a Gallon of Milk Is