Suppose the real exchange rate is 3/4 gallon of country A's gasoline per gallon of U. S. gasoline, a gallon of U. S. gasoline costs $3.00 U. S., and a gallon of gas in country A costs 6 units of their currency. What is the nominal exchange rate?

a. 3/2 units of country A's currency per dollar.

b. 8/3 units of country A's currency per dollar.

c. 3/8 of a unit of country A's currency per dollar.

d. None of the above is correct.

Question

Cynthia Patel

Mathematics

2 November, 19:41

Suppose the real exchange rate is 3/4 gallon of country A's gasoline per gallon of U. S. gasoline, a gallon of U. S. gasoline costs $3.00 U. S., and a gallon of gas in country A costs 6 units of their currency. What is the nominal exchange rate?

a. 3/2 units of country A's currency per dollar.

b. 8/3 units of country A's currency per dollar.

c. 3/8 of a unit of country A's currency per dollar.

d. None of the above is correct.

+5

Answers (1)

Know the Answer?

Faulkner · Answer 1

The nominal exchange rate (NER) is given by:

NER = RER * (foreign price / US price)

= 3/4 * (6 / 3)

= 3/2

In fact, with 1$ you can buy 1/3 of a US gallon, which corresponds to 1/4 of a foreigner gallon, which you would pay 3/2units.

Hence, the correct answer is a) 3/2 units of country A's currency per dollar.