Question

7. Computing real exchange rates 

Consider a basket of consumer goods that costs $60 in the United States. The same basket of goods costs NOK 40 in Norway. 

Holding constant the cost of the basket in each country, compute the real exchange rates that would result from the two nominal exchange rates in the following table.

Answer 1

RER = NER * (Cost of basket in U.S / Cost of basket in Norway)

Cost of Basket in U.S.($)	Cost of Basket in Norway(Kroner)	NER(Kroner per $	RER(Basket of Norway goods per basket of U.S. goods)
60	40	3.00	4.50
60	40	2.00	3.00