Suppose a country that is perceived to have an undervalued real exchange rate does not revalue. Which of the following would we expect to occur over time?
A) An increase in its trade surplus.
B) A real appreciation of its currency.
C) An increase in its price level.
D) All of the above.
E) None of the above.

Question

Quizplus · Accepted Answer

An undervalued real exchange rate makes a country's exports cheaper and imports more expensive, leading to an increase in its trade surplus (A). Over time, this can lead to a real appreciation of its currency as demand for it increases due to the trade surplus (B). Additionally, the increased demand for the country's goods and services can lead to an increase in its price level (C), making D the correct answer.

Suppose a Country That Is Perceived to Have an Undervalued