Suppose the current CanadaUK exchange rate is 0.63 pounds (the pound is the UK c

Question

Suppose the current CanadaUK exchange rate is 0.63 pounds (the pound is the UK currency) per dollar, and the aggregate price level is 170 for Canada and 140 for the UK. a. What is the real exchange rate?

a. What is the real exchange rate?

    Instructions: Round your answer to three decimal places.

(_.___) pounds per dollar.

b. What does this real exchange rate mean in terms of the relative purchasing power of the dollar and the pound?

The U.S. dollar buys the same amount of “goods” in the UK as it would in the U.S. The U.S. dollar buys more “goods” in the UK than it would in the U.S. The U.S. dollar buys less “goods” in the UK than it would in the U.S.

Explanation / Answer

Real exchange rate (Pounds per dollar) = Nominal exchange rate (Pounds per dollar) x Price of dollar / price of pound

= 0.63 x 170 / 140 = 0.765 (Pounds per dollar)

Because real exchange rate > nominal rate, U.S. dollar buys more “goods” in the UK than it would in the U.S.

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