Assume that the nominal spot exchange rate (USD/EUR) increases by 7.5%, the eurozone price level decreases by 4%, and the US price level increases by 2.5%. The change in the real exchange rate (%) is closest to:a. 0.7%. b.-6.3%. c. 14.8%.

a. 0.7%

Explanation:

The computation in the change in the real exchange rate is shown below:

Change in the real exchange rate = { (1 + change in nominal spot exchange rate) * (1 + change in the price level of euro-zone or foreign country) } : (1 + change in the price level of US or domestic country) - 1

= { (1 + 7.5%) * (1 + - 4%) } : (1 + 2.5%) - 1

= { (1.075) * (0.96) } : (1.025) - 1

= (1.032) : (1.025) - 1

= 0.7%