For a given nominal exchange rate and foreign price level, a decrease in the domestic price level ________ the real exchange rate.
A)increases
B)decreases
C)may either increase or decrease
D)offsets any change in

Question

Quizplus · Accepted Answer

The real exchange rate equals the nominal exchange rate times the domestic price level divided by the foreign price level: (e × P)/Pᶠ. All else equal, when the domestic price level, P, falls, the real exchange rate decreases.

For a Given Nominal Exchange Rate and Foreign Price Level