Question

Suppose it takes 1.25 yen to buy a rupee, and the price level in Japan is 3 and the price level in India is 1.2  Calculate the real exchange rate between India and Japan (the price of Japanese goods in terms of Indian goods).

Options

• 2

• 6

• 3

• 9

Answer 1

2

Explanation:

The price level in a foreign country: Japan) P_f = 3

Price level in home country: (India) P = 1.2

Now, real exchange rate = `"e"("P"_f)/("P")`

Price of 1.25 yen = 1 rupee

Price of 1 yen = `1/1.25 = 100/125 = 4/5`

Therefore, e = `4/5`

So, real 'exchange rate = `"e"("P"_f)/("P")`

= `4/5 xx 30/1.2`

= 2 

Therefore, the real exchange rate is 2