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If a Japanese car costs 1,500,000 yen, a similar

American car costs $30,000, and a dollar can buy
100 yen, what are the nominal and real exchange rates?

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User Negash
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1 Answer

3 votes

The nominal exchange rate is the rate at which one currency can be exchanged for another currency. In this case, we can calculate the nominal exchange rate between the US dollar and the Japanese yen as follows:

Nominal exchange rate = American car price / Japanese car price

Nominal exchange rate = $30,000 / 1,500,000 yen

Nominal exchange rate = 0.02 dollars/yen

Therefore, the nominal exchange rate between the US dollar and the Japanese yen is 0.02 dollars/yen.

The real exchange rate takes into account the relative purchasing power of the two currencies. To calculate the real exchange rate, we need to adjust the nominal exchange rate for the inflation rates in the two countries. Let's assume that the inflation rate in the US is 2% and the inflation rate in Japan is 1%.

Real exchange rate = Nominal exchange rate x (1 + inflation rate in US) / (1 + inflation rate in Japan)

Real exchange rate = 0.02 x (1 + 0.02) / (1 + 0.01)

Real exchange rate = 0.0196 dollars/yen

Therefore, the real exchange rate between the US dollar and the Japanese yen is 0.0196 dollars/yen. This means that the American car is relatively cheaper than the Japanese car in terms of purchasing power.

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User Fiddy Bux
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