If the nominal exchange rate between the dollar and the euro is $1 = €0.70,and the price of an 8.4 oz.can of Red Bull is $1.75 in Canada and €1.40 in Germany,the real exchange rate between the dollar and the euro is
A) 1.25 cans of Red Bull in Germany per can of Red Bull in Canada.
B) 0.80 cans of Red Bull in Canada per can of Red Bull in Germany.
C) 0.875 cans of Red Bull in Germany per can of Red Bull in Canada.
D) 0.56 cans of Red Bull in Germany per can of Red Bull in Canada.

Question

Quizplus · Accepted Answer

To calculate the real exchange rate, we need to convert the price of Red Bull in Canada to euros, using the nominal exchange rate of $1 = €0.70:
$1.75 x (€0.70/$1) = €1.225
So, in Canada, one can of Red Bull costs €1.225.
Now we can compare the price of Red Bull in Germany with the price in Canada, in terms of euros:
€1.40/€1.225 = 1.1429
This means that in Germany, one can of Red Bull costs 1.1429 times more than in Canada. To express this as a ratio, we can flip it:
1/1.1429 = 0.875
So the real exchange rate is 0.875 cans of Red Bull in Germany per can of Red Bull in Canada.

If the Nominal Exchange Rate Between the Dollar and the Euro