The nominal exchange rate is 2 Barbados dollars per U.S.dollar.If the price of a good in Barbados is 3 Barbados dollars and the price in the U.S.is 2 U.S.dollars,what is the real exchange rate to the nearest 100th?
A)3 Barbados goods per U.S.good
B)1.33 Barbados goods per U.S.good
C).75 Barbados goods per U.S.good
D)none of the above is correct

Question

Quizplus · Accepted Answer

To find the real exchange rate, we need to compare the relative prices of the same good in the two countries. In this case, we can use the ratio of the price of the good in Barbados to the price in the U.S.:

3 Barbados dollars / 2 U.S. dollars = 1.5

This means that the price of the good in Barbados is 1.5 times higher than the price in the U.S. To adjust for the exchange rate, we need to divide this ratio by the nominal exchange rate:

1.5 / 2 = 0.75

The real exchange rate is therefore 0.75 Barbados goods per U.S. good. This means that it is cheaper to buy the good in the U.S. than in Barbados.

Therefore, the correct answer is B, 0.75 Barbados goods per U.S. good.

The Nominal Exchange Rate Is 2 Barbados Dollars Per U