The real exchange rate can be decomposed into two parts: the a. nominal exchange

Question

The real exchange rate can be decomposed into two parts: the a. nominal exchange rate; ratio of the domestic price level to the world price level b. nominal exchange rate; difference between the domestic and foreign interest rates c. interest rate differential; difference between the domestic and foreign inflation rates d. nominal exchange rate; ratio of the price of exported goods to imported goods e. interest rate differential; ratio of the domestic price level to the world price level and the

Explanation / Answer

Correct option is (a).

Real exchange rate (RER) = Nominal exchange rate (NER) x (Domestic price level / World price level)

So, RER has two parts: (i) NER and (ii) Ratio of Domestic price level to World price level

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