Given the U.S.price level P,the foreign country price level P*,and the nominal exchange rate E in foreign currency per U.S.dollar,the real exchange rate RER is given by

Question

Quizplus · Accepted Answer

The real exchange rate measures the relative prices of goods and services between two countries. It is calculated as the nominal exchange rate multiplied by the ratio of the price levels between the two countries (foreign and domestic).

Therefore, the correct formula for the real exchange rate is RER = E × (P/P*), where E is the nominal exchange rate (foreign currency per U.S. dollar), P is the U.S. price level, and P* is the foreign country price level.

Option A matches this formula, while options B, C, and D have incorrect ratios of P and P*.