Suppose that the price of one taco is $1 in the U.S., and that tourists can buy

Question

Suppose that the price of one taco is $1 in the U.S., and that tourists can buy a taco in Mexico for 2.50 pesos. If the nominal exchange rate is 7.50 pesos per dollar, which of the following statements are true A.  The real exchange rate is 1/3 Mexican tacos per U.S. taco, which are unfavorable terms of trade for American tourists. B.  The real exchange rate is 1/3 Mexican taco per U.S. taco, which are favorable terms of trade for American tourists. C.  The real exchange rate is 3 Mexican tacos per U.S. taco, which are favorable terms of trade for American tourists. D.  The real exchange rate is 3 Mexican tacos per U.S. taco, which are unfavorable terms of trade for American tourists. Suppose that the price of one taco is $1 in the U.S., and that tourists can buy a taco in Mexico for 2.50 pesos. If the nominal exchange rate is 7.50 pesos per dollar, which of the following statements are true A.  The real exchange rate is 1/3 Mexican tacos per U.S. taco, which are unfavorable terms of trade for American tourists. B.  The real exchange rate is 1/3 Mexican taco per U.S. taco, which are favorable terms of trade for American tourists. C.  The real exchange rate is 3 Mexican tacos per U.S. taco, which are favorable terms of trade for American tourists. D.  The real exchange rate is 3 Mexican tacos per U.S. taco, which are unfavorable terms of trade for American tourists.

Explanation / Answer

Suppose that the price of one taco is $1 in the U.S., and that tourists can buy a taco in Mexico for 2.50 pesos. If the nominal exchange rate is 7.50 pesos per dollar, which of the following statements are true

Ans: C.  The real exchange rate is 3 Mexican tacos per U.S. taco, which are favorable terms of trade for American tourists.

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