If a Japanese car costs 500,000 yen, a similar American car costs $10,000, and a dollar can buy 100 yen, what are the nominal and real exchange rates?

The nominal exchange rate is the price of one currency in terms of another currency. In this case, the nominal exchange rate is: $1 = 100 yen The real exchange rate takes into account the relative purchasing power of each currency. To calculate the real exchange rate, we need to convert the prices of the cars into a common currency and adjust for the difference in purchasing power. Assuming that the prices reflect the relative value of each car in its respective market, we can use the purchasing power parity (PPP) exchange rate to adjust the prices: PPP exchange rate = (price of American car) / (price of Japanese car) = $10,000 / 500,000 yen = 0.02 dollars/yen Using this exchange rate, we can calculate the real exchange rate as follows: (real exchange rate) = (nominal exchange rate) x (PPP exchange rate) = 100 yen/$1 x 0.02 dollars/yen = 2 yen/$ So the real exchange rate is 2 yen per dollar. This means that the American dollar can purchase twice as many goods and services in Japan as it can in the United States.