Question

In January 2012, one US dollar was worth 50.0 Indian rupees. Suppose that over the next year the value of the Indian rupee decreases to 57.0 Indian rupees to one US dollar. Suppose also that the price level of all goods and services in India, as measured in rupees, falls 21.0%, so that the Indian price index falls from a value of 100 to 79.0. At the same time, suppose that the US price level increases by 6%, to 106.1. By what percentage did the value of the real exchange rate change over this period? Please give your answer to the nearest whole percentage point. 2. What will happen to the following as a result of the changes?a) America's consumption of Indian goods and services will likely _______.b) India's consumption of American goods and services will likely _______.

Answer 1

The value of the real exchange rate has increased by 35% over this period.

Step-by-step explanation:

The real exchange rate is the nominal exchange rate adjusted for changes in the price level of goods and services in each country. To calculate the percentage change in the real exchange rate, we need to compare the change in the price levels of both countries.

The percentage change in the price level in India is calculated as (100 - 79)/100 = -21%. The percentage change in the price level in the US is 106.1 - 100 = 6.1%.

To calculate the percentage change in the real exchange rate, we can use the formula: Percentage change in real exchange rate = Percentage change in nominal exchange rate - Percentage change in price levels

The percentage change in the nominal exchange rate is (57 - 50)/50 * 100 = 14%. Therefore, the percentage change in the real exchange rate is 14% - (-21%) = 35%.

The value of the real exchange rate has increased by 35% over this period.