Question

g A particular brand of toothpaste costs 4 British pounds in London. The nominal exchange rate is .80 and the real exchange rate is about 1.16. These numbers imply that the U.S. price of the same toothpaste is about a. $5.79 b. $4.29 c. $3.70 d. $2.76

Answer 1

The answer is option (d)$2.76

Step-by-step explanation:

Solution

Given that:

The cost of a particular brand of toothpaste = 4 pounds

The exchange rate = .80

Real exchange rate = 1.16

Now

Real exchange rate is given as:

R = real exchange rate

e = nominal exchange rate

PF = foreign price

P = domestic price

Suppose we say that U.S. is a domestic country and British is a foreign country we have the following formula below:

R = e(PF/P)

R = 1.16

e = 0.80

PF = 4

Thus

R = e(PF/P)

1.16 = 0.80(4/P)

P = 3.2/1.16

= 2.7586207

= $2.76

Therefore, The U.S rice of the same toothpaste is about $2.76