Question

Suppose the nominal exchange rate is 1,000 Chilean pesos per UK pound. Further, suppose the price of a bushel of UK wine is £5 per bottle and the price of a bottle of Chilean wine is 7,500 pesos.

What is the real exchange rate between Chile and the UK in terms of wine in UK?

Select one:

RER=0.001*7500/5=1.5

none of the answers

RER=1000*5/7500=0.67

RER=0.001*5/7.5=0.0015

Answer 1

Solution :-

Nominal Exchange Rate = 1 UK Pound = 1,000 Chilean pesos

The price of a bushel of UK wine per bottle = 5 Pound

The price of a bottle of Chilean wine = 7500 Pesos

Now the Real Exchange rate between Chile and the UK in terms of wine in UK =

= (1000 pesos / Pound x 5 Pound / bottle) / 7,500 pesos / bottle = 0.67 Chilean bottle per UK bottle

Therefore Correct answer is (C) that is RER=1000 * 5 / 7500 = 0.67

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