10 Nominal exchange rate e of a countrys X national currency

(10%) Nominal exchange rate (e) of a country\'s X national currency - bolivar - is: 20 bolivars = 1 USD. At 1,000 bolivars in the country X it is possible to purchase as much of goods and services as for 50 USD in the USA. Find the real exchange rate (q) of bolivar against USD. Is bolivar undervalued or overvalued? (15%) National currency of a country Z is devaluated by 25%. The coefficient of price elasticity of exports demand (EpX) is estimated as 0.4, the coefficient of price elasticity of imports demand (EpM) is supposed to equal 0.2. Find whether the devaluation will improve the trade balance of the country.

Solution

4.

Exchange rate of bolivar against USD = 1 USD / 20 bolivars

                                                            = 0.05

1 bolivar = 0.05 USD

Bolivar is undervalued, since purchasing 1 USD requires more than 1 bolivar.