If the exchange rate is 1.25 New Zealand dollars per U. S dollar, the price of apples is $2 a pound in the U. S. and 1 New Zealand dollar per pound in New Zealand, what is the real exchange rate?

A. 22.5

B. 1.25

C. 2

D. 0.75

0.75

Explanation:

Given that

Exchange rate of NZ dollar to US dollar = 1.25

A pound of apple in US = 2

A pound of apple in NZ = 1

Recall that

Real exchange rate = nominal exchange rate * (domestic price of item : foreign price of item)

= 1.5 * (1 : 2)

= 1.5 * 0.5

= 0.75

Hence, real exchange rate = 0.75