5. Econia trades with its neighbors, the countries of Governmentia and Sociologia. In Econia, the currency is called the econ; in Governmentia, the currency is called the gov; and in Sociologia, the currency is the soc.

Nominal exchange rates are:

200 econs = 1 gov, 4 socs = 1 gov, 100 econs = 1 soc.

A good that is produced and consumed in all three countries is the Mack Burger. The price of Macks in the three countries is as follows: one Mack costs 2 govs in Governmentia, 16 socs in Sociologia, and 600 econs in Econia.

a. From the perspective of Governmentia, calculate the real exchange rate in Macks between Governmentia and Sociologia, using the nominal exchange rate (4 socs per gov) and prices listed above. Explain in words what the number you calculated means.

b. If these three currencies can be freely traded so that their exchange rates are flexible or floating, can the nominal exchange rates listed above persist over time? Why or why not? (Hint: Show that currency traders could make unlimited profits if they could persistently trade at these exchange rates.)