Question

6. Which of the following statements is (are) correct?
(x) The nominal exchange rate is the rate at which a person can trade the currency of one country for the currency of another country.
(y) If the nominal exchange rate is 20 Mexican pesos per U.S. dollar, it is also 0.05 U.S dollar per peso.
(z) If the nominal exchange rate is 0.75 euro per U.S. dollar, then a meal that costs 30 euros would cost 40 U.S. dollars.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

Which of the following statements is (are) correct?
(x) The real exchange rate is the rate at which domestic goods are traded for foreign goods.
(y) An appreciation of the U.S. real exchange rate induces U.S. consumers to purchase more domestic goods and fewer foreign goods.
(z) Suppose the nominal exchange rate is 10 Mexican pesos per one U.S. dollar. If a hat costs 100 pesos in Mexico and 10 dollars in Texas then the real exchange rate is specified as one Mexican hat equals one American hat.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

Which of the following could be a consequence of a depreciation of the U.S. real exchange rate?
(x) Stan, a U.S. citizen, decides that his trip to Japan would be too costly and cancels his trip.
(y) Jack, an Australian citizen, decides that buying ceiling fans from the United States will now be less costly and doubles his order.
(z) Joe, a U.S. citizen, decides to import less engine parts for his auto parts company.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

Answer 1

6. FOR THE FIRST MCQ,

ANSWER- OPTION A (ALL ARE CORRECT )

NOMINAL EXCHANGE RATE IS THE RATE AT WHICH CURRENCIES ARE TRADED EACH OTHER.

GIVEN , $1 = 20 MEXICAN PESOS

IMPLIES , 1 MEXICAN PESOS = $1/20

= $0.05

GIVEN $1 = 0.75 EURO

OR 1 EURO = 1$1/0.75

= $4/3

NOW , COST OF MEALS IN DOLLARS THAT COST 30 EUROS = 30* 4/ 3

= $40

FOR THE SECOND MCQ ,

ANSWER - OPTION C ( x and z )

REAL EXCHANGE RATE IS THE RATE AT WHICH DOMESTIC GOODS ARE TRADED FOR FOREIGN GOODS

APPRECIATION IN REAL EXCHANGE RATE OF US MEANS DOMESTIC GOODS ARE COSTLIER THAN FOREIGN GOODS.

   REAL EXCHANGE RATE = NOMINAL EXCHANGE RATE * ( PRICE OF DOMESTIC GOODS )/ (PRICE OF FOREIGN GOODS ).

GIVEN , NOMINAL EX. RATE , $1 = 10 MEXICAN PESOS

PRICE OF A HAT IN MEXICO = 100 PESOS

PRICE OF A HAT IN TEXAS  = $10

REAL EXCHANGE RATE IN US = NOMINAL EX. RATE * ( PRICE OF HAT IN TEXAS / PRICE OF HAT IN MEXICO )

= 10 PESOS * $10/100 PESOS

= 100/100 = 1 HAT IN TEXAS/ 1 HAT IN MEXICO

FOR THIRD MCQ ,

OPTION D ( y and z)

DEPRECIATION OF REAL EX. RATE OF US IMPLIES US GOODS AND SERVICES ARE CHEAPER THAN FOREIGN.

THE CONSEQUENCE OF THIS DEPRECIATION MORE OR LESS GOING TO AFFECT OR BENEFIT  THE PEOPLE WHO MAKE USE THE US GOODS OR SERVICES AS IN THE SECOND AND THIRD CASES. BUT IN THE FIRST CASE , DEPRECIATION HAS NOTHING TO DO WITH STAN'S TRIP.