Question

Suppose a bottle of wine sells for ​$24 in California and for euro12 in France. Assuming a nominal exchange rate of 0.75 euro per​ dollar, calculate the real exchange rate between U.S. wine and French wine.
The real exchange rate is—————— .   ​(Round your response to two decimal​ places.)
Calculate the real exchange rate between U.S. wine and French wine if the domestic price of U.S. wine is now ​$10 a bottle.
The real exchange rate is now ——————   ​(Round your response to two decimal​ places.)

Answer 1

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real exchange rate = nominal exchange rate * (domestic price/ foreign price)

nominal exchange rate = 1$ = 0.75 euro (direct quote for USD so US is the domestic country

price of a bottle of wine in california = $24

price of a bottle of wine in france = 12 euros

The real exchange rate = 0.75euro/$* (24$ per US wine /12euro per french wine ) = (18/US wine) * (French wine/12)

So 1 US wine = 1.5 french wine

.

If domestic price of US wine is $10

then the real exchange rate = 0.75euro/$* (10$ per US wine /12euro per french wine) = (7.5/US wine) * (French wine/12)

So 1 US wine = 0.625 french wine