Question

The nominal exchange rate is .80 euros per dollar and the real exchange rate is 4/3. Which of the following prices for a particular good are consistent with these exchange rates

A. $4 in the U.S. and 3 euros in Italy

B. $4 in the U.S. and 3.75 euros in Italy

C. $5 in the U.S. and 3 euros in Italy

D. $6 in the U.S. and 2.5 euros in Italy

Answer 1

option (C) $5 in the U.S. and 3 euros in Italy

Step-by-step explanation:

Data provided in the question:

Nominal exchange rate, E = 0.80 euros per dollar

Real exchange rate =
`(4)/(3)`

Now,

Real exchange rate = [ Price of good in US ] ÷ [ Price of Good in Italy ]

=
`(EPU)/(PI)`

Here,

PU = Price of US in dollars

PI = Price of Italy in Euros

Thus,

Real exchange in rate

`(4)/(3)` =
`(0.8PU)/(PI)`

or

`(PU)/(PI)` =
`(5)/(3)`

hence,

we get

Ratio of Price of a good in US to Price of a Good in Italy =
`(5)/(3)`

or

we can say $5 in the U.S. and 3 euros in Italy

option (C) $5 in the U.S. and 3 euros in Italy