If 5 Swiss francs trade for $1,the U.S.price level equals $1 per good,and the Canadian price level equals 2 francs per good,then the real exchange rate between Swiss goods and Canadian goods is ______ Swiss goods per Canadian good.
A) 0.5
B) 2.5
C) 5
D) 10

Question

Quizplus · Accepted Answer

To calculate the real exchange rate, we need to compare the relative price levels between the two countries. We can do so by dividing the price level of one country by the price level of the other country and multiplying it by the nominal exchange rate.

In this case, we'll use the Canadian price level as the denominator and the Swiss price level as the numerator:
Real exchange rate = (nominal exchange rate * Swiss price level) / Canadian price level

Nominal exchange rate: 5 Swiss francs = $1
Swiss price level: $1 per good
Canadian price level: 2 francs per good

Real exchange rate = (5 * $1) / 2 francs = $2.50 per Canadian good
Therefore, the real exchange rate is 2.5 Swiss goods per Canadian good. 
Hence, the answer is B) 2.5.

If 5 Swiss Francs Trade for $1,the U