Which of the following events will cause the smallest change in the real exchange rate (s)?
A) A 3% increase in E.
B) A 7% decrease in E and a 7% decrease in P*.
C) A 7% decrease in E and a 3% increase in P.
D) A 3% increase in E and a 3% increase in P.
E) A 7% increase in P and a 7% decrease in P*.

Question

Quizplus · Accepted Answer

A 7% decrease in E and a 7% decrease in P* will cause the smallest change in the real exchange rate (s). This is because the real exchange rate is defined as the ratio of the domestic price level (P) to the foreign price level (P*). If both P and P* change by the same percentage, then the real exchange rate will remain unchanged.

Which of the Following Events Will Cause the Smallest Change