In January 2012, one US dollar was worth 50 Indian rupees. Suppose that over the

Question

In January 2012, one US dollar was worth 50 Indian rupees. Suppose that over the next year the value of the Indian rupee decreases to 60 Indian rupees to one US dollar. Suppose also that the price level of all goods and services in India, as measured in rupees, falls 20%, so that the Indian price index falls from a value of 100 to 80. At the same time, suppose that the US price level increases by 6%, to 106.

By what percentage did the value of the real exchange rate change over this period? Please give your answer to the nearest whole percentage point.

What will happen to the following as a result of the changes?

America's consumption of Indian goods and services will likely...

a)increase

b)decrease

c)stay the same

India's consumption of American goods and services will likely...

a)increase

b)decrease

c)stay the same

Explanation / Answer

Ans. 50 initial RER x (100 Orig, Price Level /100 Orig. Price Index)=50 (RER Jan '12) 60 New RER x (106 New Price Level / 80 New Price Index)= 79.5 or "80" (RER Jan '13) ((80 -50)/50 Initial RER) x 100) =60% percent change.

1. Increase

2. Decrease

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.