Three-wheel cars made in North Edsel are sold for 5000 pounds.Four-wheel cars made in South Edsel are sold for 10,000 marks.The nominal exchange rate between the two countries is three marks per pound.The real exchange rate is

Question

Quizplus · Accepted Answer

To find the real exchange rate, we need to find the ratio of the prices of the two goods adjusted for the exchange rate.

For the three-wheel cars made in North Edsel, the price in marks would be:

5000 pounds * 3 marks/pound = 15,000 marks

So the adjusted price in marks is 15,000 marks per three-wheel car.

For the four-wheel cars made in South Edsel, the price in pounds would be:

10,000 marks / 3 marks/pound = 3333.33 pounds

So the adjusted price in pounds is 3333.33 pounds per four-wheel car.

The ratio of the adjusted prices is:

15,000 marks per three-wheel car / 3333.33 pounds per four-wheel car = 4.50 marks per pound

Therefore, the real exchange rate is 0.66 three-wheel cars per four-wheel car (1/4.50), which corresponds to choice B.

Three-Wheel Cars Made in North Edsel Are Sold for 5000