Question

In: Economics

Between last year and this year, the CPI in Blueland rose from 100 to 108 and...

Between last year and this year, the CPI in Blueland rose from 100 to 108 and the CPI in Redland rose from 100 to 104. Blueland’s currency unit, the blue, was worth $0.90 (U.S.) last year and is worth $0.80 (U.S.) this year. Redland’s currency unit, the red, was worth $0.45 (U.S.) last year and is worth $0.40 (U.S.) this year. Consider Blueland as the home country.

a. Calculate Blueland’s nominal exchange rate with Redland last year.

Instructions: Enter your response rounded to one decimal place.

red/blue.


b. Calculate Blueland’s nominal exchange rate with Redland this year.

Instructions: Enter your response rounded to one decimal place.

red/blue.


c. Calculate the percentage change in Blueland’s nominal exchange rate from last year to this year.

Instructions: Enter your response as an integer value. Be certain to enter "0" if required.

%.


d. Calculate Blueland’s real exchange rate with Redland last year.

Instructions: Enter your response rounded to one decimal place.

red/blue.


e. Calculate Blueland’s real exchange rate with Redland this year.

Instructions: Enter your response rounded to three decimal places.

red/blue.


f. Calculate the percentage change in Blueland’s real exchange rate with Redland.

Instructions: Enter your response rounded to three decimal places.

Solutions

Expert Solution

a.

Nominal rate last year = Worth of blue last year / Worth of red last year

                                    = $0.90 / $0.45

                                    = 2 red/blue [Answer]

b.

Nominal rate this year = Worth of blue this year / Worth of red this year

                                    = $0.80 / $0.40

                                    = 2 red/blue [Answer]

c.

Percentage change in rate = {(Nominal rate this year – Nominal rate last year) / Nominal rate last year} × 100

                                          = {(2 – 2) / 2} × 100

                                          = (0 / 2) × 100

                                          = 0 × 100

                                          = 0 % [Answer]

d.

Real rate last year = Nominal rate last year × (CPI last year of home country (blue) / CPI last year of foreign country (red))

                              = 2 × (100 / 100)

                              = 2 red/blue [Answer]

e.

Real rate this year = Nominal rate this year × (CPI this year of home country (blue) / CPI this year of foreign country (red))

                              = 2 × (108 / 104)

                              = 2.077 red/blue [Answer]

f.

Percentage change in real rate = {(Real rate this year – Real rate last year) / Real rate last year} × 100

                                          = {(2.077 – 2) / 2} × 100

                                          = (0.077 / 2) × 100

                                          = 7.7 / 2

                                          = 3.850 % [Answer]

Rahul Sunny answered 2 years ago
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