If a U.S. dollar purchases 4 Argentinean pesos, and a gallon of milk costs $3 in the U.S. and 6 pesos in Argentina what is the real exchange rate?

Question

a.

1/2
b.

2
c.

3/2
d.

2/3

Answer 1

To calculate the real exchange rate, we can use the following formula:

\[ \text{Real Exchange Rate} = \left(\frac{\text{Nominal Exchange Rate} \times \text{Price of Domestic Good}}{\text{Price of Foreign Good}}\right) \]

Where:

• Nominal Exchange Rate (the price of foreign currency in terms of domestic currency) is 4 Argentinean pesos per U.S. dollar.
• Price of Domestic Good (gallon of milk in the U.S.) is $3.
• Price of Foreign Good (gallon of milk in Argentina) is 6 pesos.

Using the formula:

1. Nominal Exchange Rate = 4 ARS/USD
2. Price of Domestic Good = $3
3. Price of Foreign Good = 6 ARS

Substituting these values into the formula:

\[ \text{Real Exchange Rate} = \frac{4 , \text{pesos} \times 3 , \text{USD}}{6 , \text{pesos}} = \frac{12}{6} = 2 \]

So, the real exchange rate is:

b. 2