Chartered Financial Analyst Level 1

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Explanation:

The correct answer is A (0%). The real exchange rate change is calculated using the formula:

\text{Real Exchange Rate Change} = \left( \frac{1 + \Delta P_f}{1 + \Delta P_d} \right) \times (1 + \Delta S) - 1

Where:

$\Delta P_f$ is the foreign price change (6% for the Eurozone),
$\Delta P_d$ is the domestic price change (2% for the US),
$\Delta S$ is the nominal exchange rate change (-4% for USD/EUR).

Plugging in the values:

\left( \frac{1 + 0.06}{1 + 0.02} \right) \times (1 - 0.04) - 1 \approx 0\%

Thus, the real exchange rate remains approximately unchanged. Options B and C are incorrect due to miscalculations involving additive assumptions or misinterpretations of the nominal exchange rate change.

Explanation:

The correct answer is A (0%). The real exchange rate change is calculated using the formula:

\text{Real Exchange Rate Change} = \left( \frac{1 + \Delta P_f}{1 + \Delta P_d} \right) \times (1 + \Delta S) - 1

Where:

$\Delta P_f$ is the foreign price change (6% for the Eurozone),
$\Delta P_d$ is the domestic price change (2% for the US),
$\Delta S$ is the nominal exchange rate change (-4% for USD/EUR).

Plugging in the values:

\left( \frac{1 + 0.06}{1 + 0.02} \right) \times (1 - 0.04) - 1 \approx 0\%

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Given a 2% price level increase in the US and a 6% increase in the Eurozone, alongside a 4% decrease in the nominal USD/EUR exchange rate, the absolute change in the real exchange rate is closest to:

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Last updated: July 15, 2026 at 14:06

0%.

46.2%

4%.

30.8%

8%.

23.1%