When exchange rates are defined as foreign currency per dollar and foreign goods per US goods, the ability to profit by purchasing wheat in the United States and selling it in China implies that the
A)nominal exchange rate is less than 1.
B)nominal exchange rate is greater than 1.
C)real exchange rate is less than 1.
D)real exchange rate is greater than 1.

Question

Quizplus · Accepted Answer

The real exchange rate is less than 1, indicating that the cost of foreign goods in terms of domestic goods is lower. This makes it profitable to buy wheat in the U.S. (where it's cheaper) and sell it in China (where it's relatively more expensive), exploiting the difference in real exchange rates.

When Exchange Rates Are Defined as Foreign Currency Per Dollar