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Q. What is the real exchange rate between the dollar and the euro equal to?
Answer: Let actual dollar/euro exchange rate q$/ENominal exchange rate E$/EPrice of an unchanging basket in US PUS Price of an unchanging basket in Europe PE Then q$/E = E$/E PE / PUS. A boost in the real dollar/euro exchange rate is called as a real depreciation of the dollar beside the euro a decrease in purchasing power of the dollar.
A diminish in the real dollar/euro exchange rate is called as a real appreciation of the dollar beside the euro a increase in purchasing power of the dollar.
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