The nominal exchange rate is 4 Saudi Arabian riyals, 8 Moroccan dirham, 60 Indian rupees, or. 8 euros per U. S. dollar. A fast food breakfast costs $5 in the U. S., 30 riyals in Saudi Arabia, 40 Moroccan dirham in Morocco, 250 Indian rupees in India, and 5 euros in France. According to these numbers, where is the real exchange rate between American and foreign goods the lowest? a. Saudi Arabia

b. Britain

c. India

d. Morocco

b. Britain (France)

Explanation:

The nominal exchange rate is the rate at which an individual can trade the currency of his country for another country.

According to the numbers given for exchange rates, the real exchange rate between American and foreign goods is lowest with Britain.

A) Saudi Arabia

Explanation:

The real exchange rate = nominal exchange rate x (domestic price of a breakfast / foreign price of a breakfast)

a breakfast in America = $5

a breakfast in Saudi Arabia = $7.50

a breakfast in Morocco = $5

a breakfast in India = $4.17

a breakfast in France/Britain = $6.25

real exchange rate with Saudi Arabia = $1 x ($5/$7.50) = $0.67, the riyal is over appreciated against the US dollar

real exchange rate with Morocco = $1 x ($5/$5) = $1

real exchange rate (India) = $1 x ($5/$4.17) = $1.20, the rupee is undervalued against the US dollar

real exchange rate (France/Britain) = $1.25 x ($5/$6.25) = $1