Homework Answers
Q1)
A) nominal exchange rate
= real exchange rate * foreign price / domestic price
NER = RER * Pf/Pd
= 10*4/8
= 5
b) growth rate of NER
gNER = gRER + πf - πd
πf : foreign inflation rate
πd : domestic inflation rate
gNER = 10% + 4% - 6%
= 8%
nominal exchange rate changes by 8%
c) 5 = 8 + πf - 3
5 = 5+ πf
foreign inflation rate = 0%
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