The real exchange rate between the U.S. dollar and the Canadian dollar will remain constant if an increase in the value of the U.S. dollar against the Canadian dollar is offset by:

Question

Quizplus · Accepted Answer

The real exchange rate reflects the relative purchasing power of two currencies. If the value of the U.S. dollar increases relative to the Canadian dollar, the real exchange rate between the two currencies will change. However, if this increase in value is offset by inflation in Canada, meaning that prices in Canada are rising faster than in the United States, then the purchasing power of the Canadian dollar is decreasing relative to the U.S. dollar. This means that the real exchange rate remains constant. The other choices do not necessarily offset the increase in the value of the U.S. dollar and therefore would not keep the real exchange rate constant.

The Real Exchange Rate Between the U