The real exchange rate equals the _____ the ratio of the price levels of two countries.
A) nominal exchange rate divided by
B) nominal exchange rate multiplied by
C) sum of
D) nominal exchange rate minus

Question

Quizplus · Accepted Answer

The real exchange rate is calculated by multiplying the nominal exchange rate by the ratio of the price levels of two countries. This is because the nominal exchange rate only reflects the exchange rate of currencies, but doesn't take into account the differences in the price levels of goods and services between countries. By adjusting the nominal exchange rate with the ratio of price levels, we get a more accurate measure of the purchasing power of currencies in different countries, which is the real exchange rate.

The Real Exchange Rate Equals the _____ the Ratio of the Price