If a bushel of wheat costs $6.40 in the United States,costs 40 pesos in Mexico,and the nominal exchange rate is 10 pesos per dollar,then the real exchange rate is
A)1.60
B)1.25
C).625
D)None of the above is correct.

Question

Quizplus · Accepted Answer

The real exchange rate is calculated by adjusting the nominal exchange rate for the price levels in the two countries. Here, the real exchange rate = (Nominal exchange rate * Price level in the US) / Price level in Mexico = (10 pesos/dollar * $6.40) / 40 pesos = 1.60.

If a Bushel of Wheat Costs $6