If the ratio of the price level in the U.S.to the price level in Canada is 1.3 and the nominal exchange rate is 0.75 Canadian dollars per U.S.dollar, then the real exchange rate is

Question

Quizplus · Accepted Answer

The real exchange rate can be calculated using the formula:

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

In this case, we want to find the real exchange rate between Canada and the US.

Nominal exchange rate = 0.75 Canadian dollars per US dollar

Foreign price level (Canada) / Domestic price level (US) = 1/1.3 (since the price level ratio is given as US/Canada)

Real exchange rate = 0.75 * (1/1.3) = 0.975

Therefore, the real exchange rate is 0.975. Option C is correct.

If the Ratio of the Price Level in the U