Last summer when you went to Stockholm Sweden you exchanged $20 to get 16 kronas to buy a meal. This summer you exchanged $25 to get 18 kronas to buy the same meal. The nominal exchange rate

Question

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If the exchange rate has fallen, it means that the foreign currency (kronas) has appreciated relative to the domestic currency (U.S. dollars). This implies that the same amount of dollars buys fewer kronas than before. Therefore, the price of the meal in kronas must have increased. According to the purchasing-power parity, this implies that prices in the U.S. rose faster than prices in Sweden since the dollar lost purchasing power compared to the krona. Thus, both conditions are met for choice D to be the correct answer.

Last Summer When You Went to Stockholm Sweden You Exchanged