Question

______ rate is the ratio of foreign prices to domestic prices. 

Options

• Nominal exchange rate

• Real exchange rate

• Both nominal exchange rate and real exchange rate

• None of the above

Answer 1

The real exchange rate is the ratio of foreign prices to domestic prices. 

Explanation:

The ratio of international prices to domestic prices is known as the real exchange rate. To put it another way, it compares foreign and domestic prices.

Real exchange rate = `("eP"_f)`

Where `"P"_f` − price level of foreign currency

P − Price level of domestic currency

e − Nominal exchange rate