Translate Practice Questions

Contributed Content (0)

Ask a Question

Show 1 Answer (Answer provided by Ion Sterpan)
user's picture

They are both true, and the formulas express the same idea.

But here is what it's confusing. The definition of the concept "exchange rate" in the MRU video is Foreign Currency over Domestic Currency. In the formula you provided, it is the other way around.
In the second formula, "Price of Foreign Basket" stands for what in the MRU video is called "Price Level in the Foreign Country". This raises no problems.
The formula as shown in the MRU video is:
(Foreign Currency over Domestic Currency) multiplied by (Domestic Price Level over Foreign Price Level).
Plugging in the numbers:
12/1 * 2/1 = 24
The RER is 24 to 1.
In the formula you provide, if we keep the definitions, the result is different:
(12/1 * 1) / (2) = 6.
This is unacceptable, which means the definitions used in this formula must be different. Indeed, in the formula you provided, the definition of the concept of exchange rate must be "Domestic Currency over Foreign Currency".
Plugging in:
(1/12 * 1) / (2) = 1 /24
The RER here is 1 to 24,
which refers to the same same thing as the formula in the MRU video, the only difference being how you express the exchange rate, namely whether you place the Foreign or the Domestic currency in the numerator.

Please register or login to answer a question
user's picture
Please register or login to answer a question
Please register or login to answer a question
Please register or login to ask a question