If We Let P = the Domestic Price of a Basket

Multiple Choice

If we let P = the domestic price of a basket of goods and P_f the foreign price of the same basket of goods measured in domestic currency:

A) If P/P_f > 1 foreign products will seem inexpensive.
B) If P/P_f >1 foreign products will seem expensive.
C) If P/P_f= 1 the nominal exchange rate is also = 1.
D) You cannot determine the relative prices of foreign goods from the equation P/P_f .