Suppose, the nominal exchange rate (er) of US dollar is $1.20, price (GDP deflator) in USA is 115 and the price (GDP deflator) in Canada in 112. The real exchange rate of US dollar is:
A) 1.30.
B) 1.23.
C) 1.14.
D) 1.10.

Question

Quizplus · Accepted Answer

The real exchange rate is calculated as (Nominal Exchange Rate * Price of Domestic Goods) / Price of Foreign Goods. Here, it is (1.20 * 115) / 112 = 1.23214, which rounds to 1.23.

Suppose, the Nominal Exchange Rate (Er) of US Dollar Is