Suppose that an automobile costs $30,000 in the United States and 25,000 Euros in France. Further suppose that the exchange rate is .8 (one US dollar = .8 Euros)
a. What is the real exchange rate? ____________ b. In which country is the automobile less expensive? ____________ c. Do your answers suggest that the US will have a trade surplus or a trade deficit with France? ____________ d.
Does you answer to c suggest that US citizens will be borrowing money from France or lending money to France? ____________ e.
Given the prices of the automobiles in France and the United States, what should the nominal exchange rate be in order to have purchasing power parity.