Suppose that a slice of pepperoni pizza costs £1 in London and $2 in San Francisco. If the real exchange rate is one-third of a slice of U.S. pizza for one slice of British pizza, how many pounds should you receive in exchange for $1?

Question

Quizplus · Accepted Answer

Given the real exchange rate, 1 slice of British pizza (costing £1) is equivalent to 1/3 of a slice of U.S. pizza. Since a U.S. slice costs $2, 1/3 of a U.S. slice costs $2/3. Therefore, £1 is worth $2/3, meaning $1 should exchange for £1.5 to maintain the real exchange rate.

Suppose That a Slice of Pepperoni Pizza Costs £1 in London