CFA Level I · CFA Level I Exam · Capital Flows and the FX Market
The spot rate is 1.50 USD/EUR. The US price index is 120 and the euro-area price index is 100. The real exchange rate, defined as the domestic price of foreign currency (USD/EUR) times the foreign price level divided by the domestic price level, is closest to:
The real exchange rate is about 1.25 USD/EUR. It is found by multiplying the nominal rate of 1.50 by the foreign price level of 100 and dividing by the domestic price level of 120. Inverting the price ratio would wrongly give 1.80.
- A1.25Correct
- B1.50
- C1.80
Explanation
Real rate = 1.50 × (100/120) = 1.25. The value 1.80 results from inverting the price ratio (1.50 × 1.20), which is the wrong adjustment. The value 1.50 ignores the price levels.
Did you get it right without looking?
One question tells you little. A timed set on Capital Flows and the FX Market shows your real accuracy, how long you take and where you lose marks.
More Capital Flows and the FX Market questions
- A country fixes its exchange rate and allows free capital mobility. According to the impossible trinity, the country most likely must:
- Large, sustained capital inflows into an emerging market that has a flexible exchange rate are most likely to cause the domestic currency to…
- A dealer quotes USD/CHF at 0.9100 bid and 0.9106 ask. A client buys 1,000,000 USD from the dealer. The amount of CHF the client most likely …
- The real exchange rate between two currencies is best described as the nominal exchange rate:
- A country with a fixed exchange rate has a large current account deficit and falling foreign reserves. Investors begin to expect a devaluati…
- A dealer quotes the EUR/USD spot rate as 1.0790/1.0810 (bid/offer, USD per EUR). A client who wants to sell EUR 2,000,000 to the dealer will…