c)

Consider the case of the exchange rate between the U.S. dollar and German euro, where S is the

nominal German-euro-per-U.S.- dollar exchange rate in Table 1. Indicate the formula and find

the real exchange rate in year 2019 and 2020. Based on the findings, what can you conclude on

the value of U.S. dollar relative to German euro? (Please use four decimal points)

Table 3:

Year

S

U.S. CPI

German CPI

2019

0.7

220

102

2020

0.9

235

107

Note: CPI stands for Consumer Price Index

(6 marks)

(d)

Policymakers may intervene in foreign exchange market if they prefer their currency value to

remain stable relative to another currency. Explain how Australian policymakers anchor the value

of their currency when there is an increase in the demand for Australian goods by Malaysian

consumers.

(5 marks)