If E Is the Real Exchange Rate, E' Is the Nominal

question 59

Multiple Choice

If e is the real exchange rate, e' is the nominal exchange rate, P is the domestic price level, and Pf is the foreign price level, then

• A) e' ( = e(P/Pf).
• B) e = e' (P/Pf).
• C) e = e' (Pf/P).
• D) e = Pf/e' (P.

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Definitions:

Accounting Rate of Return

A financial metric used to assess the profitability of an investment, calculated by dividing the average return from an investment by the initial cost.

Profitability Index

A financial tool used to determine the desirability of an investment, calculated as the present value of future cash flows divided by the initial investment cost.

Internal Rate of Return

A financial metric that estimates the profitability of potential investments by calculating the discount rate that makes the net present value of all cash flows from a project equal to zero.

Internal Rate of Return

The discount rate at which the net present value of all cash flows from a project equals zero, used to assess the profitability of potential investments.