A pair of jeans cost $25 in the U.S.and 1600 dinar in Algeria.If the nominal exchange rate is 75 dinar per U.S.dollar,then the real exchange rate is
A)more than one,so a profit could be made by buying jeans in Algeria and selling them in the U.S.
B)more than one,so a profit could be made by buying jeans in the U.S.and selling them in Algeria.
C)less than one,so a profit could be made by buying jeans in Algeria and selling them in the U.S.
D)less than one,so a profit could be made by buying jeans in the U.S.and selling them in Algeria.

Question

Quizplus · Accepted Answer

The real exchange rate is the price of a good in one country relative to the price of the same good in another country, adjusted for the exchange rate. In this case, the real exchange rate is the price of a pair of jeans in Algeria relative to the price of a pair of jeans in the U.S., adjusted for the exchange rate.The price of a pair of jeans in Algeria is 1600 dinar. The price of a pair of jeans in the U.S. is $25. The nominal exchange rate is 75 dinar per U.S. dollar.The real exchange rate is:1600 dinar / 25 U.S. dollars * 75 dinar / U.S. dollar = 80The real exchange rate is more than one, so a profit could be made by buying jeans in Algeria and selling them in the U.S.

A Pair of Jeans Cost $25 in the U