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Question regarding the nominal exchange rate

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Reference no: EM131104119

Suppose China exports TVs and uses the yuan as its currency, whereas Russia exports vodka and uses the ruble. China has a stable money supply and slow, steady technological progress in TV production, while Russia has very rapid growth in the money supply and no technological progress in vodka production. Based on this information, what would you predict for the real exchange rate (measured as bottles of vodka per TV) and the nominal exchange rate (measured as rubles per yuan)? Explain your reasoning. (Hint: For the real exchange rate, think about the link between scarcity and relative prices.)

Reference no: EM131104119

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