The real exchange rate between the domestic currency of a country and the foreign currency increases by 2 percent.If the domestic price level increases by 4 percent while the foreign price level increases by 3 percent, the nominal exchange rate will

Question

The real exchange rate between the domestic currency of a country and the foreign currency increases by 2 percent.If the domestic price level increases by 4 percent while the foreign price level increases by 3 percent, the nominal exchange rate will​

Quizplus · Accepted Answer

The real exchange rate increase of 2% implies that the nominal exchange rate must adjust to account for the difference in inflation rates. The domestic price level increases by 4%, and the foreign price level increases by 3%, so the nominal exchange rate must increase by 1% to maintain the 2% increase in the real exchange rate.

The Real Exchange Rate Between the Domestic Currency of a Country