Answer:
option (C) $5 in the U.S. and 3 euros in Italy
Explanation:
Data provided in the question:
Nominal exchange rate, E = 0.80 euros per dollar
Real exchange rate = [tex]\frac{4}{3}[/tex]
Now,
Real exchange rate = [ Price of good in US ] ÷ [ Price of Good in Italy ]
= [tex]\frac{EPU}{PI}[/tex]
Here,
PU = Price of US in dollars
PI = Price of Italy in Euros
Thus,
Real exchange in rate
[tex]\frac{4}{3}[/tex] = [tex]\frac{0.8PU}{PI}[/tex]
or
[tex]\frac{PU}{PI}[/tex] = [tex]\frac{5}{3}[/tex]
hence,
we get
Ratio of Price of a good in US to Price of a Good in Italy = [tex]\frac{5}{3}[/tex]
or
we can say $5 in the U.S. and 3 euros in Italy
option (C) $5 in the U.S. and 3 euros in Italy
