The exchange rate equals
A)the real exchange rate divided by the foreign price level.
B)the real exchange rate when the government budget is balanced.
C)the real exchange rate multiplied by the foreign price level, divided by the domestic price level.
D)the real exchange rate when the inflation rate is less than 2 percent a year.
E)the real exchange rate multiplied by the domestic price level, divided by the foreign price level.

Question

Quizplus · Accepted Answer

The exchange rate is often defined as the nominal exchange rate, which is the rate at which one currency can be exchanged for another. The real exchange rate adjusts the nominal exchange rate by the relative prices of a similar basket of goods between two countries. Therefore, the real exchange rate multiplied by the foreign price level, divided by the domestic price level (option C), correctly describes how to calculate the nominal exchange rate from the real exchange rate, taking into account the price levels in both countries.

The Exchange Rate Equals