Given the U.S. price level P, the foreign country price level P*, and the nominal exchange rate E in foreign currency per U.S. dollar, the real exchange rate RER is given by
A) RER = P/P*) / E
B) RER = E x P/P*)
C) RER = E x P*/P)
D) RER = P x E/P*)

Question

Quizplus · Accepted Answer

The real exchange rate (RER) is the relative price of goods and services of two countries. It measures the purchasing power of one currency relative to another currency. RER is calculated as RER = E x (P*/P), where E is the nominal exchange rate, P is the domestic price level, and P* is the foreign price level. Therefore, the correct option is B, which is the same as RER = E x (P*/P).