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the United States, a three-pound can of coffee costs about $5. If the exchange rate is 0.8 euros per dollar and a three-pound can of coffee in Belgium costs 7 euros. What is the real exchange rate

User Atchoum
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1 Answer

7 votes

Answer:

=4/7 cans of Belgium coffee for one can of US coffee

Step-by-step explanation:

Cost of 1 can of coffee in US = $5

Cost of similar can of coffee in Belgium = EURO 7

Real Exchange Rate (Euro/$) =

Nominal Exchange rate ×
(Price\ in\ domestic\ market)/(Price\ in\ foreign\ market)

= 0.8 × 5/7

=4/7 cans of Belgium coffee per can of US coffee

Nominal exchange rate refers to the exchange rate between two countries which is not adjusted for inflation.

Nominal exchange rate when adjusted for inflation is known as real exchange rate.

Real rate = Nominal rate - Inflation rate

User Shahzad Hassan
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