If the real exchange rate between the U.S.and Japan is 1,the nominal exchange rate is 100 yen per U.S.dollar and the price of chicken in the U.S.is $2.50 per pound,what is the price of chicken in Japan?
A)400 yen per pound
B)250 yen per pound
C)100 yen per pound
D)40 yen per pound

Question

Quizplus · Accepted Answer

If the real exchange rate is 1, then the nominal exchange rate of 100 yen per U.S. dollar is an overvaluation of the Japanese yen. This means that goods are more expensive in the U.S. than in Japan.

Using the formula for the real exchange rate: 
Real exchange rate = Nominal exchange rate x (Price level in foreign country ÷ Price level in domestic country)

Assuming that the price level in Japan is lower than in the U.S., we can calculate the real exchange rate to be less than 1. This means that the Japanese yen is undervalued and goods should be cheaper in Japan.

If the price of chicken is $2.50 per pound in the U.S., then the price in Japan can be calculated using the nominal exchange rate:

Price in Japan = Price in U.S. x Nominal exchange rate 
Price in Japan = $2.50 x 100 yen per dollar

Price in Japan = 250 yen per pound

Therefore, the price of chicken in Japan is 250 yen per pound.

If the Real Exchange Rate Between the U