Question: 1. Consider the nominal exchange rate between the US dollar and UK pound. Suppose 1 pound is worth 1.5 dollars. Calculate E (exchange rate). 2.

1. Consider the nominal exchange rate between the US dollar and UK pound. Suppose 1 pound is worth 1.5 dollars. Calculate E (exchange rate).

2. Consider an appreciation of the domestic currency. What would be the effect on the resulting E?

3. Consider a depreciation of the foreign currency. What would be the effect on the resulting E?

4. Suppose the price of US goods in dollars, P, is 10, and the price of British goods in pounds, P* = 20. Further assume that the nominal exchange rate is given by 2/3. What would be the price of US goods in pounds? Calculate the real exchange rate from this.

5. Calculate the price of British goods in dollars. Calculate the real exchange rate again with this (Using the prices of both goods expressed in dollars)

6. Suppose the inflation is higher in the US, while the nominal exchange rate does not change. What is the effect on the real exchange rate?

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