If the nominal exchange rate e is foreign currency per dollar, the domestic price is P, and the foreign price is P*, what is the definition of the real exchange rate?
A) e(P*/P)
B) e(P/P*)
C) e + P/P
D) e - P/P*

Question

Quizplus · Accepted Answer

The real exchange rate measures the relative price of domestic and foreign goods and services, taking into account the exchange rate and inflation. It is calculated by multiplying the nominal exchange rate by the ratio of foreign price to domestic price (P*/P). Therefore, the formula for the real exchange rate is e(P*/P).

If the Nominal Exchange Rate E Is Foreign Currency Per