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

Question

Quizplus · Accepted Answer

The exchange rate is determined by the relative prices between domestic and foreign goods. Therefore, the exchange rate is equal to the real exchange rate (which reflects the relative value of domestic and foreign goods) multiplied by the foreign price level, divided by the domestic price level. This formula reflects the fact that a higher foreign price level relative to the domestic price level should lead to a weaker exchange rate, whereas a lower foreign price level relative to the domestic price level should lead to a stronger exchange rate.

The Exchange Rate Equals