If the nominal exchange rate in dollars per pound rises by 5%,the U.S.inflation is 2%,and the U.K.inflation is 0%,what is the percent change in the real exchange rate?

Question

Quizplus · Accepted Answer

The formula for the real exchange rate is Real Exchange Rate = Nominal Exchange Rate * (1 + Home Inflation Rate) / (1 + Foreign Inflation Rate).
Plugging in the given values, we get,
Real exchange rate = (1.05) * (1 + 0.02) / (1 + 0) = 1.07
So the percent change in the real exchange rate is 7% - 1 = 6% or 0.06.
Therefore, the correct answer is C) 3%.

If the Nominal Exchange Rate in Dollars Per Pound Rises