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Suppose the nominal Canadian - US exchange rate is C$1 = US$0.65 (so that one Canadian dollar buys 65 US cents), and the Canadian price level is twice as high as the US price level.
-The real value of US$1 in Canada is then
A) C$0.65
B) C$0.77
C) C$1.30
D) C$1.40
E) C$1.54

Question

Quizplus · Accepted Answer

The real exchange rate can be calculated as (nominal exchange rate * foreign price level) / domestic price level. Thus, the real value of US$1 in Canada is (0.65 * 1) / 2 = 0.325 Canadian dollars. To get the reciprocal, we invert the fraction to get C$1 / 0.325 = C$3.08 per US dollar. Therefore, the real value of US$1 in Canada is C$3.08, which is equivalent to C$0.77 for US$0.25.

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