ECON 2400 Lecture Notes - Lecture 3: Exchange Rate, Nominal Interest Rate, Real Interest Rate

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Nominal exchange rate is value of foreign currency in terms of domestic currency. It is number of $ canadian you need to buy 1. Real exchange rate is in terms of goods. It is number of canadian goods you need in order to buy 1 european good. P is price level: it is number of canadian dollars you need in order to buy a basket of goods in canada. Pf is nominal of s you need in order to buy a basket of goods in europe. So p & pf are in different currencies: they are not comparable. To compare we have to express both in terms of same currency:$. E x pf - number of you need in order to buy a basket of goods in europe e: number of to buy 1. Pf: number of s to buy a basket of goods in europe. f. E x pf & p are comparable.

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