Real Exchange Rate. RER = e × (P/Pf) For example, the India VS Australia case Nominal exchange rate e = 50 Rupee/$ Price of a shirt 250 Rupees in India 10 dollars in Australia Are you better off buying in India or in the Australia? . RER = e × (P/Pf)
Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.
= 50 Rs/$ × ($10/Rs250)
= 2 Indian shirts/1 AU shirt
S the reserves that correspond to the country’s balance of payment deficit.
Q of $
At official exchange rate of 0.70 £/$ is above the fundamental/market value;
The $ (against £) is overvalued
Excess supply of $ in the foreign exchange market: the length of AB
To keep the official exchange rate from falling down, the gov’t could purchase a quantity of $ with £ in foreign exchange market equal to length of AB.