Question

In: Finance

Suppose that S=$1.10/€. If the price of an item costs $6 in theU.S. and €5...

Suppose that S=$1.10/€. If the price of an item costs $6 in the U.S. and €5 in Germany, what is the real exchange rate? Do not use any symbol or unit. Also, make sure to round your answers to the nearest 10000th decimal points.

Expert Solution

We can calculate the desired result as follows:

Exchange rate is $ 1.10 / €

So 1€ = $ 1.10

Price of item in US = $ 6

Price of item in Germany = € 5

Real Exchange Rate in terms of € = Nominal Exchange Rate * ( Domestic Price of Good / Foreign Price of Good )

= 1.10 * ( 5 / 6 )

= 1.10 * 0.83333

= $ 0.9166666

Real Exchange rate in terms of € = $ 0.916666 / €

Real Exchange Rate in terms of $ = Nominal Exchange Rate * ( Domestic Price of Good / Foreign Price of Good )

= ( 1 / 1.10) * (6 / 5)

= (0.90909) * 1.20

= € 1.090909

Real Exchange rate in terms of $ = € 1.090909 / $

jeff jeffy answered 2 years ago

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