Question

Consider a basket of consumer goods that costs $60 in the United States. The same basket of goods costs NOK 40 in Norway. Holding constant the cost of the basket in each country, compute the real exchange rates that would result from the two nominal exchange rates in the following table.Cost of Basket in US (Dollars) Cost of Basket in Norway(Korner) Nominal Exchange rate (Korner per dollar) Real exchange rate(Basket of norwegian goods per basket) 60 40 3.00 _________ 60 40 2.00 _________

Answer 1

Answer:

4.5 and 3

Explanation:

We know that

Real exchange rate = Nominal exchange rate × (Cost of the basket in US  ÷  Cost of the basket in  Norway)

So according to this formula, the computation is shown below

When the nominal exchange rate is 3, then the real exchange rate would be

= 3 × (60 ÷ 40)

= 4.5

When the nominal exchange rate is 2, then the real exchange rate would be

= 2 × (60 ÷ 40)

= 3