Given the Canadian price level P, the foreign country price level P*, and the nominal exchange rate E in foreign currency per Canadian dollar, the real exchange rate RER equals
A)P × E × P*.
B)P × E/P*).
C)E × P*/P).
D)P/P*)/ E.
E)E × P/P*).

Question

Quizplus · Accepted Answer

The real exchange rate (RER) is calculated as E × (P/P*), where E is the nominal exchange rate (in foreign currency per Canadian dollar), P is the domestic price level, and P* is the foreign price level. This formula adjusts the nominal exchange rate by the relative price levels, providing a measure of the real value of the domestic currency in terms of foreign goods.

Given the Canadian Price Level P, the Foreign Country Price