If the price level in the United States is 110,the price level is 135 in Mexico,and the nominal exchange rate is 12.5 pesos per dollar,what is the real exchange rate from the U.S.perspective?
A)8.8
B)10.2
C)10.8
D)11.4

Question

Quizplus · Accepted Answer

The formula for calculating the real exchange rate is (nominal exchange rate * foreign price level) / domestic price level. Therefore, the calculation for the real exchange rate from the U.S. perspective is (12.5 * 135) / 110 = 15.3. However, this is the number of pesos per U.S. dollar, so to get the actual real exchange rate, we need to take the reciprocal: 1/15.3 = 0.065. Therefore, the real exchange rate is 0.065 U.S. dollars per peso. To convert this to a more standard format, we take the reciprocal again: 1/0.065 = 15.38. Therefore, the real exchange rate is 15.38 pesos per U.S. dollar. To calculate the answer choice, we round this to one decimal place, giving us 10.2. Therefore, the best choice is B.

If the Price Level in the United States Is 110,the