Given the U.S. price level P, the foreign country price level P*, and the real exchange rate RER in foreign currency per U.S. dollar, the nominal exchange rate E would be given by

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Quizplus · Accepted Answer

The equation for calculating the nominal exchange rate E is E = RER x P/P*. This formula takes into account both the relative price levels (P/P*) and the real exchange rate (RER). It is important to note that the RER indicates how much of a foreign currency can be exchanged for one US dollar, while the nominal exchange rate represents the actual exchange rate between two currencies. Therefore, the formula is a combination of the relative price levels and the real exchange rate.