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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 choices0.930.460.65More information needed

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 choices0.930.460.65More information needed

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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 you calculate it:

  1. First, find the nominal exchange rate. In this case, it's given as AUD1=USD1 = USD0.7.

  2. Next, find the price of the good in both countries. In Australia, it's AUD2,000andintheUS,it′sUSD2,000 and in the US, it's USD1,300.

  3. Now, calculate the real exchange rate using the formula: (Price of Good in Foreign Currency / Price of Good in Domestic Currency) * Nominal Exchange Rate.

  4. Substitute the given values into the formula: (USD1,300/AUD1,300 / AUD2,000) * 0.7 = 0.455

So, the real exchange rate of USD against AUD is 0.46 (rounded to two decimal places).

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