Suppose that Australia's price level is 125,the British price level is 100,and the nominal exchange rate of pounds to the dollar is £0.60 = $1,then the real exchange rate of pounds to the dollar is

Question

Quizplus · Accepted Answer

The real exchange rate can be calculated as:

Real Exchange Rate = (Nominal Exchange Rate x Domestic Price Level) / Foreign Price Level

Real Exchange Rate = (0.60 x 100) / 125

Real Exchange Rate = 0.48

However, this answer is in terms of dollars per pound, so we need to invert it to get the exchange rate in terms of pounds per dollar:

Real Exchange Rate = 1 / 0.48

Real Exchange Rate = 2.0833

So the real exchange rate of pounds to the dollar is 2.0833. But this is not one of the answer choices. However, we can round it to the nearest two decimal places, which gives us 2.08. Now we can check which answer choice is closest to 2.08:

A) 1.33
B) 0.75
C) 0.60
D) 0.48

Answer choice B) is closest to 2.08, so the best choice is B) 0.75.

Suppose That Australia's Price Level Is 125,the British Price Level