Suppose that Australia's price level is 200, the British price level is 100, and the nominal exchange rate of pounds to the dollar is £0.40 = $1, then the real exchange rate of pounds to the dollar is:

Question

Quizplus · Accepted Answer

The formula for the real exchange rate is:

Real exchange rate = Nominal exchange rate * (Foreign price level / Domestic price level)

Plugging in the given values:

Real exchange rate = £0.40/$1 * (100/200) = £0.40/$1 * 0.5

Real exchange rate = £0.20/$1 = $1/£0.20

Real exchange rate = $5/£1

Real exchange rate = 5

Therefore, the real exchange rate of pounds to the dollar is 5.

However, the options given in the question are all decimal values, so we need to convert the real exchange rate of 5 into a decimal.

Decimal value of 5 = 1/5 = 0.20

Hence, the correct answer is B) 0.80.

Suppose That Australia's Price Level Is 200, the British Price