Question

E$/euro denotes the dollar per euro nominal exchange rate. P$/(Peruo)denotes the consumer price index in the US(Europe). which of the following is the definition of the dollar per euro real exchange rate？

A. E$/euro

B.E$/euro P$/P euro

C.E$/euro P euro/P$

D.none of the above

Answer 1

Ans: E$/euro P euro/P$

Explanation:

Let, Nominal Exchange Rate is denoted as NER

       Real Exchange Rate is denoted as RER

       P^* = Price of a good in the euro area

       P = Price of the good in the U.S

RER = NER * (P^* / P)

        = (E$/euro) * (P euro/P$)

Thus, option [C] is correct answer.