Initially the nominal exchange rate between the South Korean won and the U.S. dollar is 950 won per dollar. If the nominal exchange rate increases to 1000 won per dollar and the U.S and Korean price levels do not change, the real exchange rate

Question

Quizplus · Accepted Answer

The real exchange rate is the ratio of the price of a set of goods in one country to the price of the same set of goods in another country, adjusted for the exchange rate. If the nominal exchange rate increases, the real exchange rate will increase if the price levels in the two countries do not change. This is because the same set of goods will now cost more in the country with the weaker currency, making it more expensive to import goods from that country.

Initially the Nominal Exchange Rate Between the South Korean Won