5a. If milk costs 4 USD per gallon in the United States and 3 GBP per gallon in
ID: 1156588 • Letter: 5
Question
5a. If milk costs 4 USD per gallon in the United States and 3 GBP per gallon in Great Britain, if there is purchasing power parity, what is the nominal exchange rate? What is the real exchange rate?
5b. If milk costs 3 USD per gallon in the United States and 2.50 GBP per gallon in Great Britain, the nominal exchange rate is 0.75, what is the real exchange rate?
5c. List a domestic and a foreign entity who would benefit if the dollar appreciated. List a domestic and a foreign entity who would be harmed if the dollar appreciated.
Explanation / Answer
Answer:
Answer 5a . the nominal exchange rate is exchange rate of one currency (dollar) to another (GBP)
Nominal exchange rate (Enom) = GBP per gallon/ USD per gallon
= ¾ = .75
the real exchange rate = Enom * USD per gallon/ GBP per gallon
= .75* 4/3
= 1
Answer 5b. the nominal exchange rate is = .75 (already given )
The real exchange rate is = .75* 3/2.50
= . 9
*(the milk cost is given as 3 USD per gallon in US and 2.50 GBP per gallon in Britain. Now if we calculate the nominal exchange rate it is coming as .83 but in the question it is given as .75. don’t know it’s a misprint or what but I have solved as it is given in the question. If we calculate real exchange rate with .83 nominal exchange rate than the real exchange rate will be = .99 )
Answer 5c. Benefitted if the dollar is appreciated :
Domestic entity:
Foreign entity:
Harmed if dollar value appreciated:
Domestic entity:
Foreign entities:
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