Answer to Question #86173 in Macroeconomics for Ana

Question

Changes in the dollar-peso exchange
B) Suppose the price level in the U.S. is 100 and the price level in Mexico is 50. What is the real exchange rate of the dollar in terms of pesos?
C) Suppose the nominal exchange rate now changes to 1 dollar = 15 pesos. Is this an appreciation or depreciation of the dollar against the peso?
D) Calculate the real exchange rate if the exchange rate is 1 dollar=15 pesos and the price level in the U.S. is still 100 and the price level in Mexico is still 50.
E) Suppose the information in part D is still true (1 dollar=15 pesos), except the price level in Mexico is now 25 (instead of 50). The price level in the U.S. is still 100. Calculate the new real exchange rate given this information.
F) Compare the change in the nominal exchange rate (from 1 dollar = 20 pesos to 1 dollar = 15 pesos) to the change in the real exchange rate between the answers you found in parts D and E. Which change was larger in magnitude?

Answer 1

B) Suppose the price level in the U.S. is 100 and the price level in Mexico is 50. If the nominal exchange rate is 1 dollar = 20 pesos, then the real exchange rate of the dollar in terms of pesos is 1 dollar = 10 pesos.

C) Suppose the nominal exchange rate now changes to 1 dollar = 15 pesos. It is a depreciation of the dollar against the peso. 

D) If the exchange rate is 1 dollar = 15 pesos and the price level in the U.S. is still 100 and the price level in Mexico is still 50, then the real exchange rate is 1 dollar = 7.5 pesos.

E) Suppose the information in part D is still true (1 dollar=15 pesos), except the price level in Mexico is now 25 (instead of 50). The price level in the U.S. is still 100. The new real exchange rate given this information is 1 dollar = 3.75 pesos.

F) The change in the real exchange rate in part E was larger in magnitude.