Question

9. Suppose nominal exchange rates are 110 Japanese yen per dollar, 0.9 euro per dollar, and 16 Mexican pesos per dollar. A pizza costs 1,600 yen in Tokyo, Japan, 12 euro in Munich, Germany, 180 pesos in Mexico City and 12 dollars in Raleigh, North Carolina. Which of the following statements is (are) correct?
(x) Pizza is more expensive in Tokyo than Mexico City but less expensive than in Munich.
(y) Pizza is less expensive in Raleigh than Munich but more expensive than in Mexico City.
(z) Pizza is less expensive in Munich than Tokyo but more expensive than in Raleigh.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only

10. Other things the same, if the U.S. dollar depreciates relative to the Mexican peso, then the nominal exchange rate
A. rises and it will cost fewer Mexican peso to travel in the U.S.
B. rises and it will cost more Mexican peso to travel in the U.S.
C. falls and it will cost fewer Mexican peso to travel in the U.S.
D. falls and it will cost Mexican peso to travel in the U.S.
E. is unchanged and it will cost the same Mexican peso to travel in the U.S.

11. Which of the following statements is (are) correct?
(x) The real exchange rate is the rate at which domestic goods are traded for foreign goods.
(y) An appreciation of the U.S. real exchange rate induces U.S. consumers to purchase more domestic goods and fewer foreign goods.
(z) Suppose the nominal exchange rate is 10 Mexican pesos per one U.S. dollar. If a hat costs 100 pesos in Mexico and 10 dollars in Texas then the real exchange rate is specified as one Mexican hat equals one American hat.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

Answer 1

9.

Nominal exchange rates of different countries in terms of dollars are as follows:

110 Japanese Yen = 1 Dollar

0.9 Euro =1 Dollar

16 Mexican Pesos =1 Dollar

Prices of pizza in different countries are as follows

Place	price of pizza	Nominal exchange rate	prices in terms of dollars
Tokyo	1600 Yen	110	1600/110=$14.54
Munich	12 Euro	0.9	12/0.9=$13.33
Mexico city	180Mexican Pesos	16	180/16=$11.25
Raleigh	12 Dollars	-	$12

Lets analyse each alternative

(x) Pizza is more expensive in Tokyo than Mexico City but less expensive than in Munich.

False

Pizza is more expensive in Tokyo i.e. 14.54>11.25 but the other part is incorrect pizza is expensive Tokyo compared to Munich also

(y) Pizza is less expensive in Raleigh than Munich but more expensive than in Mexico City.

True

Pizza is less expensive in Raliegh than Munich i.e. 12<13.33,more expensive than Mexico city i.e. 12>11.25

(z) Pizza is less expensive in Munich than Tokyo but more expensive than in Raleigh.

True

Pizza is less expensive in Munich compared to Tokyo i.e. 13.33<14.54,more expensive than Raleigh i.e. 13.33>12

Hence correct answer is D . (y) and (z) only

10.

If Other things the same, if the U.S. dollar depreciates relative to the Mexican peso, then the nominal exchange rate

A. rises and it will cost fewer Mexican peso to travel in the U.S.

False .As USD depriciates,exchange rate falls as it will cost less Mexican peso for each dollar

B. rises and it will cost more Mexican peso to travel in the U.S.

As USD depriciates,exchange rate falls as it will cost less Mexican peso for each dollar

C. falls and it will cost fewer Mexican peso to travel in the U.S.

True .as USD depriciates ,nominal exchange rate falls,and it will cost less Mexican pesos to travel to US as the purchasing power of Mexican Pesos increases.

D. falls and it will cost Mexican peso to travel in the U.S.

False .

E. is unchanged and it will cost the same Mexican peso to travel in the U.S.

False. As the prices of dollar changes so does the nominal exchange rate so it is totally wrong to say that it will remain unchanged.

Hence correct answer is (c)

11.

(x) The real exchange rate is the rate at which domestic goods are traded for foreign goods.

True. The real exchange rate measures the price of foreign goods in terms of domestic goods.

(y) An appreciation of the U.S. real exchange rate induces U.S. consumers to purchase more domestic goods and fewer foreign goods.

False. because increase in US exchange rate will increase purchasing power of USD which will make foreign goods cheaper. above sentence is not valid

(z) Suppose the nominal exchange rate is 10 Mexican pesos per one U.S. dollar. If a hat costs 100 pesos in Mexico and 10 dollars in Texas then the real exchange rate is specified as one Mexican hat equals one American hat.

True.

10 Mexican pesos per one U.S. dollar

hat price = 100 Pesos =10dollars

Hat costs 10dollars in mexico and same price in Texas

hence we can say that one Mexican hat equals one American hat

correct answer is c. (x) and (z).