1. What is real exchange rate between the dollar and the euro equal to? Using the formula that you must write and defining ALL the variables, explain the terms real depreciation and real appreciation.
2. Find the real exhange rate for the following case: Assume that the representatives basket of European goods and services costs 40 euros and the representative U.S. basket costs $50, and the dollar/euro exchange rate is $0.90 per euro, then the price of the European basket in terms of U.S. basket is ______. Show all your calculations.
3. Explain how does an increase in the real exchange rate affect exports and imports? Remember: exports and imports are measured in terms of domestic output, i.e dollar value, not volume of units.