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The CPI in Europe is 140, and the CPI in U.S. is 133. If absolute purchasing...

  1. The CPI in Europe is 140, and the CPI in U.S. is 133. If absolute purchasing power parity does NOT hold, and the nominal exchange rate is 0.90 $/€, then the real exchange rate ($/€) is _________(Round to two decimal places).

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Answer #1

Real exchange rate = Nominal exchange rate * ( domestic CPI) / (foreign CPI)

Here domestic currency = Euro

Foreign currency = dollar

Solution Real exchange rate Nominal exchange rate x domestic priu foreign Price -) 0.9 x 140 - 0.943.81€

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