Reference no: EM131704589

Suppose that last year, the nominal exchange rate between the Japanese yen and the British pound was ¥225.0 per €1.0, one unit of Japanese output cost ¥2000, and one unit of British output cost €8.0.

A. What was the real exchange rate between the U.K. and Japan last year, expressed as the cost of British output (i.e. - the quantity of Japanese output that exchanges for 1 unity of British output)? In which country are goods more expensive last year?

B. Suppose that between last year and this year the British pound appreciate by 20% against the Japanese yen (a 20% increase in the number of yen required to buy 1 pound). if the price of goods in the U.K. and Japan are unchanged from last year, what is this year's new real exchange rate? In which country are goods more expensive this year?

C. Now suppose, instead, that between last year and this year, the pound appreciated by 20% against the yen and Japan experienced a 30% increase in its price level (a 30% increase in the number of yen required to purchase one unit of Japanese output). All else equal, what is this year's real exchange rate in that case? In which country are goods more expensive this year?