Question

A pound of steak costs $10 in the U.S. and 56.25 riyals (the currency of Saudi Arabia) in Saudi Arabia. If the real exchange rate is 2/3, what is the nominal exchange rate

Answer 1

Answer: 3.75 Riyals / USD

Step-by-step explanation:

The Real Exchange rate is different from the Nominal exchange rate as it takes into account, the differences between the 2 nations being compared in terms of prices of goods and services.

As such it can be used to calculate the Nominal rate;

Real Exchange Rate = (Cost in U.S. x Nominal Exchange Rate) / Cost in Saudi Arabia

2/3 = (10 x Nominal Exchange Rate) / 56.25

2/3 x 56.25 = 10 x Nominal Exchange Rate

10 x Nominal Exchange Rate = 37.50

Nominal Exchange Rate = 37.50 / 10

Nominal Exchange Rate = 3.75 Riyals / USD

The nominal exchange rate is 3.75 Riyals for every $1.