In the United States,a cup of hot chocolate costs $5.In a foreign country,the same hot chocolate costs 6.5 units of that country's currency.If the exchange rate were 1.3 units of foreign currency per U.S.dollar,what is the real exchange rate?
A)1/2 cup of that country's hot chocolate per cup of U.S.hot chocolate
B)1 cup of that country's hot chocolate per cup of U.S.hot chocolate
C)2 cups of that country's hot chocolate per cup of U.S.hot chocolate
D)None of the above is correct.

Question

Quizplus · Accepted Answer

To find the real exchange rate, we need to compare the cost of one cup of hot chocolate in the foreign currency to the cost of one cup of hot chocolate in U.S. dollars.

One cup of hot chocolate in the U.S. costs $5, and in the foreign country, it costs 6.5 units of currency.

To convert 6.5 units of currency into U.S. dollars, we need to divide by the exchange rate:

6.5 units / 1.3 units per dollar = $5

This means that one cup of hot chocolate in the foreign country has the same value as $5 in the U.S.

Therefore, the real exchange rate is 1 cup of that country's hot chocolate per cup of U.S. hot chocolate.

In the United States,a Cup of Hot Chocolate Costs $5