For a given nominal exchange rate and domestic price level,an increase in the foreign price level __________ the real exchange rate.

Question

Quizplus · Accepted Answer

An increase in the foreign price level will result in a decrease in the real exchange rate. This is because as the foreign prices increase, the goods and services produced in that country become relatively more expensive compared to those produced domestically. As a result, this reduces the competitiveness of the foreign goods in the domestic market, leading to a decrease in demand for these goods, and a decrease in the demand for foreign currency needed to purchase them. This, in turn, leads to a decrease in the value of the foreign currency relative to the domestic currency, resulting in a decrease in the real exchange rate.

For a Given Nominal Exchange Rate and Domestic Price Level,an