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# 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 - Economics

Sum

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).

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#### Solution

Price level in foreign country: (Japan) Pf = 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 =1/25=100/125 = 4/5

Therefore, e = 4/5

So, real exchange rate =e(P_f)/P

=4/5xx30/1.2

= 2

Therefore, the real exchange rate is 2.

#### Notes

First find out the nominal exchange rate as a price of yen in rupees.

Concept: Foreign Exchange Market - Determination of the Exchange Rate
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#### APPEARS IN

NCERT Class 12 Economics - Introductory Macroeconomics
Chapter 6 Open Economy Macroeconomics
Exercise | Q 4 | Page 101
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