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If the exchange rate between AUD and USD is AUD$1=USD$0.7, and the price of good A is AUD$2,000 in Australia, and USD$1,300 in the US. Calculate the real exchange rate of USD (the US) against AUD (Australia). Group of answer choices0.65More information needed0.460.93

Question

If the exchange rate between AUD and USD is AUD1=USD1=USD0.7, and the price of good A is AUD2,000inAustralia,andUSD2,000 in Australia, and USD1,300 in the US. Calculate the real exchange rate of USD (the US) against AUD (Australia). Group of answer choices0.65More information needed0.460.93

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Solution

To calculate the real exchange rate, we first need to understand what it is. The real exchange rate is the purchasing power of one currency relative to another. It's a measure of how much of a good or service one currency can purchase relative to another currency.

Here's how to calculate it:

  1. First, we need to find the price of the good in both countries in a common currency. We already have the price of the good in the US in USD, which is USD$1,300.

  2. To find the price of the good in Australia in USD, we need to convert the AUD price to USD using the nominal exchange rate. The nominal exchange rate is AUD1=USD1 = USD0.7. So, the price of the good in Australia in USD is AUD2,000∗0.7=USD2,000 * 0.7 = USD1,400.

  3. Now, we can calculate the real exchange rate. The real exchange rate is the ratio of the foreign price to the domestic price. In this case, the foreign price is the price of the good in the US (USD1,300)andthedomesticpriceisthepriceofthegoodinAustraliainUSD(USD1,300) and the domestic price is the price of the good in Australia in USD (USD1,400). So, the real exchange rate is USD1,300/USD1,300 / USD1,400 = 0.93.

So, the real exchange rate of USD (the US) against AUD (Australia) is 0.93.

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