Why aren't they using the regular real exchange rate formula?

[bandabears]

Can someon explain why they aren’t just solving for the nominal exchange rate in the regular formula of:
Real exchange rate = nominal x (1+foreign/1+domestic)
Assume the percentage increases in each of the following listed items:
Percentage increase
Real domestic exchange rate (USD/EUR)
5
Eurozone price level
2
U.S. price level
1.5
The predicted change in the nominal US spot exchange rate is closest to:
5.5%.
4.5%.
–0.5%.


Incorrect.

 

[akthem]

they use the no-arbitrage exchange rate formula:
forward (dom/for) / spot (d/f) = (1+ int dom) / (1+int for.)
then they moved spot to the right side of the equation and replaced it with (1+ int dom) / (1+int for.)
Which gives you: forward (dom/for) / ((1+ int dom) / (1+int for.)) = spot (d/f)
a / (b/c) = a x (c/b)
You end up with: forward (dom/for) x ((1+int for.) / (1+ int dom) = spot (d/f)
Plug in the values (percentage changes):
(1.05) x (1.015/1.02) -1 = spot —— spot = 1.04485 - 1 = +4.5%