Question 5: Real Exchange Rates [12 Points]

(a) What is the difference between the real exchange rate and the nominal exchange rate? [4 Points]

Suppose a box of hot chilies in Thailand costs 1000 baht, while the same box of chilies in the US costs

$25. If the exchange rate between the Thai baht and the US dollar is $1= 50 baht:

(b) How many boxes of chilies can you buy in Thailand for one box purchased in the US? [4 Points]

(c) Suppose the exchange rate changes to $1= 60 baht. How many boxes of chilies can you buy in

Thailand for the amount it takes to purchase one box in the US? What is the effect on US net exports?

Explain. [4 Points]