Problem
A. A Canadian investor is considering the purchase of U.K. securities. The current exchange rate is Can$1.50 per pound. Assume that the price level of a typical consumption basket in Canada is 1.50 times the price level of a typical consumption basket in the United Kingdom.
B. Calculate the real exchange rate.
C. One year later, price levels in Canada have risen 2 percent, while price levels in the United Kingdom have risen 4 percent. The new exchange rate is Can$1.4708 per pound. What is the new real exchange rate?
D. Did the Canadian investor experience a change in the real exchange rate?