The Mystery of Nominal Exchange Rate Value
What is the value of the nominal exchange rate that makes the real exchange rate equal to 1?
Can we determine the specific value of the nominal exchange rate in this scenario?
To determine the value of the nominal exchange rate that makes the real exchange rate equal to 1:
We need additional information such as the purchasing power parity (PPP) exchange rate or the inflation rates of the United States and France. The real exchange rate reflects the relative purchasing power of two currencies and is calculated by dividing the nominal exchange rate by the ratio of price levels between two countries.
In order to determine the specific value of the nominal exchange rate that makes the real exchange rate equal to 1 in this scenario, we require additional information. One possible approach is to use the concept of purchasing power parity (PPP), which states that the exchange rate should equalize the prices of identical goods in different countries.
If we have the PPP exchange rate or the inflation rates of the United States and France, we can calculate the value of the nominal exchange rate that would make the real exchange rate equal to 1. Without this additional information, it is not possible to calculate the exact value of the nominal exchange rate.
The nominal exchange rate is influenced by various factors such as economic conditions, interest rates, trade balances, and market forces. Therefore, to determine the value of the nominal exchange rate in this scenario, further information is necessary.