Can someon explain why they aren’t just solving for the nominal exchange rate in the regular formula of: Real exchange rate = nominal x (1+foreign/1+domestic)
Assume the percentage increases in each of the following listed items:
Percentage increase
Real domestic exchange rate (USD/EUR)
5
Eurozone price level
2
U.S. price level
1.5
The predicted change in the nominal US spot exchange rate is closest to:
Well , None of us read the question properly (Me included) , The question gives real exchange and asks us to calculate the nominal exchange rate , so the formula Real exchange rate = nominal x (1+foreign/1+domestic) needs to be rearranged. That’s why domestic CPI appears in the numerator.
Well it took me , 30 minutes but the importance of reading the question properly cannot stressed enough.