The percentage change in the nominal exchange rate equals the percentage change in the real exchange rate plus the:

a. domestic inflation rate minus the foreign inflation rate.

b. foreign inflation rate minus the domestic inflation rate.

c. domestic interest rate minus the foreign interest rate.

d. foreign exchange rate minus the domestic exchange rate.

Correct answer is a

Explanation:

Real domestic interest rate is:

r d = i d - E p d

Real foreign interest rate is:

r f = i f - E p f

From there, we have:

i d = r d + E p d and

i f = r f + E p f

i d - i f = r d + E p d - r f - E p f or

i d - i f = (r d - r f) + (E p d - E p f)

b. percentage change in real exchange rate plus foreign inflation rate minus the domestic inflation rate.

Explanation:

Nominal Exchange Rate is the usual foreign exchange rate, showing how much of two currencies can be exchanged in terms of each other.

Real Exchange rate is the exchange rate which measures the comparative purchasing power of a currency in foreign, by accounting for both nominal exchange rate & price (inflation) levels in the countries  

Mathematical relationship between both can be explained by under mentioned formula :

Percentage change in Nominal Exchange Rate = Percentage change in real exchange rate + Foreign Inflation Rate - Domestic Inflation Rate

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