If the nominal exchange rate rises and price levels stay constant, the real exchange rate will
A) rise
B) stay constant
C) fall
D) could rise, fall or stay constant

Question

Quizplus · Accepted Answer

The real exchange rate is calculated by adjusting the nominal exchange rate for the differences in price levels between two countries. If the nominal exchange rate rises and price levels stay constant, then the real exchange rate will also rise. This is because the purchasing power of the currency has increased, meaning that it can buy more goods and services in the foreign country. This results in an increase in competitiveness for the domestic country's exports, which in turn can lead to an increase in demand for the currency, further boosting the nominal exchange rate.

If the Nominal Exchange Rate Rises and Price Levels Stay