Question

Use the following information to answer the question(s) below:

The exchange rate between the Australian dollar and the British pound is 0.65 (i.e., 0.65 pounds per Australian dollar). In the U.K., the price level is 1.0 and the interest rate is 15%. In Australia, the price level is 0.5 and the interest rate is 10%. The inflation rate in both countries is zero.


Refer to the information above. The price of Australian goods measured in pounds is:

Select one:

a. 0.425 U.K. goods.

b. 0.525 U.K. goods.

c. 0.325 U.K. goods.

d. 0.125 U.K. goods.

e. 0.225 U.K. goods.

Answer 1

The exchange rate between Australian Dollar and Pounds is 0.65. This means:

1 Australian Dollar = 0.65 Pounds

Now, it is given that price level in UK is 1.0 While Price level in Australia is 0.5

This means price of a good in UK is 1 Pound,price of the same good is 0.5 Australian Dollar in Australia

We can put it as 1 Pound = 1/2 Austalian Dollar .

To complete the trade between thses countries,he have to convert both in a single currency. We will convert it in Pounds

We know that 1 Australian Dollar =0.65 Pound

Price of goods is 1/2  Australian Dollar, therefore 0.65/2=0.325 Pounds

Hence, The prices of Australian goods measured in pounds is 0.325 U.K. goods.

Answer is c) 0.325 U.K. goods.