Answer:
Real exhange rate is 47 pesos per dollars.
Explanation:
The real exhange rate has been calculated by using following formulae.
e = er x (P*/P)
The above equation shows that e depends on the er and the price levels in the two countries. Given the value of er, if the mexico price level P* rises, then the e will fall. Since a pesos is worth less, it will buy fewer dollars. However, if the US price level P rises, then the e will go up. This means that the dollar is worth less, a pesos will buy more dollars.
e= 40 * (120/102) = 47
