If the cost of a typical basket of goods in the U.S. is $100 and in China it is 500 yuan, and the nominal exchange rate is 10 yuan per dollar, what is the real exchange rate?
A) 1.
B) 2.
C) 3.
D) 4.

Question

Quizplus · Accepted Answer

To find the real exchange rate, we need to compare the cost of the basket of goods in both countries adjusting for inflation. One way to do this is by dividing the cost of the basket of goods in one country by the cost of the same basket of goods in the other country and multiplying by the nominal exchange rate.

In this case:

Real exchange rate = (Cost of basket of goods in U.S. / Cost of basket of goods in China) x Nominal exchange rate
Real exchange rate = ($100 / 500 yuan) x 10 yuan per dollar
Real exchange rate = 2

Therefore, the real exchange rate is 2.

If the Cost of a Typical Basket of Goods in the U.S