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
A) E = RER × (P/P*).
B) E = RER × (P*/P).
C) E = (P/P*) / RER.
D) E = P × (RER/P*).

Question

Quizplus · Accepted Answer

The nominal exchange rate E is calculated as E = RER × (P*/P), where RER is the real exchange rate, P is the domestic price level, and P* is the foreign price level. This formula adjusts the real exchange rate by the ratio of foreign to domestic prices to get the nominal exchange rate.