Homework Answers
Nominal exchange rate (10 years ago): $1 = 1000 pesos.
Nominal exchange rate (now): $1 = 1500 pesos.
Real exchange rtae = nominal exchange rate * (domestic price / foreign price)
Real exchange rate = nominal exchange rate * (Price in Canada / Price in Chile)
% change in nominal exchange rate = [(1500 - 1000) / 1000] * 100
% change in nominal exchange rate = 50.
Inflation rate in Canada = 25%
it means % change in price in Canada = 25
inflation rate in Chile = 80%
it means % change in price in Chile = 80
Real exchange rate = nominal exchange rate * (Price in Canada / Price in Chile)
In terms of % change:
% change in real exchange rate = % change in nominal exchange rate + % change in Price in Canada - % change in price in Chile.
% change in real exchange rate = 50 + 25 - 80
% change in real exchange rate = -5
There is a 5% fall in the real exchange rate.
It implies that traveling in Chile is more expensive now than it was 10 years ago.
Answer: Option (C)
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