The domestic currency price of a representative foreign expenditure basket is
A) P, the domestic price level.
B) E, the nominal exchange rate.
C) P times E, the domestic price level times the domestic price level.
D) P , the foreign price level.
E) P times E, the foreign price level times the nominal exchange rate.

Question

The domestic currency price of a representative foreign expenditure basket is
A) P, the domestic price level. 
B) E, the nominal exchange rate. 
C) P times E, the domestic price level times the domestic price level. 
D) P , the foreign price level. 
E) P times E, the foreign price level times the nominal exchange rate.

Quizplus · Accepted Answer

The domestic currency price of a representative foreign expenditure basket is the foreign price level multiplied by the nominal exchange rate, as it measures how much of the domestic currency is required to purchase the foreign currency needed to buy the expenditure basket. Therefore, the correct answer is E: P times E, the foreign price level times the nominal exchange rate.

The Domestic Currency Price of a Representative Foreign Expenditure Basket