Question

1. Suppose that current U.S-UK exchange rate is 0.63 pound (the pound is the UK currency) per dollar, and the aggregate price level is 170 for the U.S and 140 for the UK

a. What is the U.S real exchange rate? (round answer to three decimal places)

2. What does this real exchange rate mean in terms of the relative purchasing power of the dollar and the pound?

a. The US dollar buys less stuff in the UK than it would in the US

b. The US dollar buys the same amount of stuff in the UK as it would in the US

c. The US dollar buys more stuff in the UK than it would in the US

3. All else constant, the real exchange rate between American and British goods would be higher if

a. Prices of British goods were lower, or the number of pounds a dollar purchased were higher

b. Prices of British goods were higher, or the number of pounds a dollar purchased was lower

c. Prices of British goods were higher, or the number of pounds a dollar purchased was higher

d. Prices of British goods were lower, or the number of pounds a dollar purchased was lower

Answer 1

Q-1 :: ANSWER ::

=> Explanation ::

Real Exchange Rate = Nominal Exchange Rate * Domestic Price Level(US)/Foreign Price Level(UK)

= 0.63 * 170/140

= 0.63 * 1.2142

= 0.765 Pound Per USD

Q-2 :: ANSWER :: (A) The US dollar buys less stuff in the UK than it would in the US

=> Explanation ::

As We Show that If We Want to Purchase 1 Dollar We Only have To Pay Just 0.765 Pound Which Means Pound Value Is Higher Than The Dollar So If You Purchase Goods Or Some stuff In UK By Dollar Than You buy Less Stuff In Comparison To US Because UK Pound Value Is Higher Than Dollar So it purchasing Power Decrease In UK And US Person buy Less Stuff In UK than It Would In The US.

Q-3 :: ANSWER :: (A) Prices of British goods were lower, or the number of pounds a dollar purchased were higher.

=> Explanation ::

All else constant, the real exchange rate between American and British goods would be higher if The Prices Of British Goods Were Lower, Or The Number Of Pounds A Dollar Purchased Were Higher. so If Prices Of British Goods Lower than US Dollar Buy More Goods In UK so Dollar Appreciate Against Pound So It Leads to Purchase The Higher Amount Of Pound With The Dollar Because Exchange Rate Increased Or dollar Value Increased.