Question

A particular brand of shampoo costs 6 Canadian dollars in Toronto. The nominal exchange rate is about 1.2 and the real exchange rate is .90 . These numbers imply that the U.S. dollar price of the same shampoo is about___________.

a. $7.99
b. $6.49
c. $5.39
d. $4.49

Answer 1

The correct answer is D that is $4.49

Step-by-step explanation:

The US dollar price of the shampoo is computed as:

Price in US = (Price in Canada × Real exchange)/ Nominal exchange rate

where

Real exchange is 0.90

Price in Canada is 6

Nominal exchange rate is 1.2

Putting the values above:

Price in US = (6 × 0.90) / 1.2

= 5.4 / 1.2

= $4.49 or $4.5