Consider the following conditions : follows The exchange rate between the U. S. dollar and the British pound is pound. equals $1. follows The U. S. price level is 100 and the British price level is 105. The real exchange rate equals nothing. (Enter your response rounded to two decimal places.)

Question

Business

Rocco

1 September, 13:50

Consider the following conditions : follows The exchange rate between the U. S. dollar and the British pound is pound. equals $1. follows The U. S. price level is 100 and the British price level is 105. The real exchange rate equals nothing. (Enter your response rounded to two decimal places.)

+1

Answers (2)

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Trace Hester · Answer 1

1.05 real exchange rate between the US dollar and the British pound.

Explanation:

The equation for calculating real exchange rate is:

RER = eP * / P

e = nominal dollar-pound exchange rate P * = average price of a good in Great Britain P = average price of a good in the US

RER = (1 x 105) / 100 = 105 / 100 = 1.05 real exchange rate between the US dollar and the British pound.

This means that the British pound is overvalued compared to the US dollar.

Carlie Williams · Answer 2

The real exchange rate equals

1.05.

Explanation:

To calculate the real exchange rate use the formula:

R = (E x P*) / P

Where:

R: real exchange rate = ?

E: nominal exchange rate = $1

P*: foreign price level = 105

P: domestic price level = 100

R = (1 x 105) / 100 = 1.07 rounded to two decimal places.

Remember, the real exchange rate is only a measure of the price of foreign goods relative to the price of domestic goods of a country.