Question

From 1995-2010, the real exchange rate between the Australian dollar and the U.S.

     dollar (measured as the price of U.S. goods divided by the price of Australian goods)

     fell at an average rate of 5% per year. Over the same period, the average annual rate

     of inflation in Australia exceeded U.S. inflation by 2% per year. Given this

     information, what was the average annual percentage change in the nominal exchange

     rate between the two currencies, expressed as Australian dollars per U.S. dollar?

     Show your work and any formulas you use.  

Answer 1

Answer:

Fall in the real exchange rate per year Means Fall in currency of U.S compared australian

When the fall in the real exchange rate of two countries australia and the U.S in 1995-2010 at average basis is 5 % and the Inflation increase in the same time by 2 % per year average in the australia compared to U.S.A then the annual percentage change in the nominal exchange rate between the two currencies is the

Formula :-

Fall in the real exchange rate per year - Inflation increase in the australia

5 % - 2 %

=3 %

Hence the change is 3 % in the nominal exchange rate of the australian dollars per U.S Dollar .

Note:-While the nominal exchange rate tells how much foreign currency can be exchanged for a unit of domestic currency, the real exchange rate tells how much the goods and services in the domestic country can be exchanged for the goods and services in a foreign country.

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