Final answer:
False
The statement that the real exchange rate is 2/3 British Big Mac per American Big Mac is false because the correct real exchange rate is 1.5 American Big Macs per British Big Mac, calculated by converting British prices to dollars using the nominal exchange rate.
Step-by-step explanation:
If the nominal exchange rate is 2 British pounds to the dollar, and the price of a Big Mac is $2 in the United States and 6 pounds in Great Britain, then to find the real exchange rate, we must express both prices in the same currency.
Since 1 American Big Mac is $2 and 1 British Big Mac is 6 pounds, and the nominal exchange rate is 2 pounds to the dollar, we can convert the British Big Mac price into dollars (6 pounds * $0.5/pound = $3). Now, the real exchange rate can be calculated as the ratio of the two prices in the same currency.
The real exchange rate would be the price of the British Big Mac in dollars ($3) divided by the price of the American Big Mac ($2), resulting in 1.5 American Big Macs per British Big Mac. Therefore, the statement that the real exchange rate is 2/3 British Big Mac per American Big Mac is false.
Changes in exchange rates can have significant impacts on international business. For instance, if the dollar weakens, the pound grows stronger, meaning that foreign currency can buy more dollars.
This can affect the profitability of international buying, selling, lending, and borrowing for firms. As the exchange rates can change swiftly, for example during events like Brexit, firms must closely monitor these changes to manage financial risks effectively.