Question

Assume that the nominal spot exchange rate (USD/EUR) increases by 7.5%, the eurozone price level decreases by 4%, and the US price level increases by 2.5%. The change in the real exchange rate (%) is closest to:a.0.7%.b.−6.3%.c.14.8%.

Answer 1

Answer:

a. 0.7%

Explanation:

The computation in the change in the real exchange rate is shown below:

Change in the real exchange rate = {(1 + change in nominal spot exchange rate) × (1 + change in the price level of euro-zone or foreign country)} ÷ (1 + change in the price level of US or domestic country) - 1

= {(1 + 7.5%) × (1 + -4%)} ÷ (1 + 2.5%) - 1

= {(1.075) × (0.96)} ÷ (1.025) - 1

= (1.032) ÷ (1.025) - 1

= 0.7%