A fall in the euro's nominal exchange rate in terms of US dollars
A) will always lead to a fall in the real exchange rate of the euro in terms of US dollars.
B) may be offset by a rise in the price level in the eurozone so that the real exchange rate of the euro in terms of US dollars is unchanged.
C) will always make US imports into the eurozone countries more expensive relative to goods produced in the eurozone.
D) may make the eurozone a less affordable holiday destination for US residents.

Question

Quizplus · Accepted Answer

A fall in the nominal exchange rate does not necessarily mean a fall in the real exchange rate if offset by a rise in the price level in the eurozone. Therefore, option A is incorrect. Option C is partially correct because US imports into the eurozone will become relatively more expensive, but it does not necessarily mean eurozone goods will become cheaper in the US. Option D is also partially correct, but it is not always the case as it depends on various other factors such as the level of income and preferences of US residents.

A Fall in the Euro's Nominal Exchange Rate in Terms