A fall in the rand's nominal exchange rate in terms of US dollars
A)will always lead to a fall in the real exchange rate of the rand in terms of US dollars.
B)may be offset by a rise in the price level in SA so that the real exchange rate of the rand in terms of US dollars is unchanged.
C)will always make US imports into SA more expensive relative to goods produced in SA.
D)may make SA a less affordable holiday destination for US residents.

Question

Quizplus · Accepted Answer

A fall in the nominal exchange rate of the rand may lead to a fall in its real exchange rate if the price level in SA remains constant. However, if the price level in SA rises, it could offset the fall in the nominal exchange rate, keeping the real exchange rate unchanged. Therefore, option B is correct. Option A is incorrect because it is not always the case that a fall in the nominal exchange rate leads to a fall in the real exchange rate. Option C may or may not be true and is not a necessary outcome of a fall in the nominal exchange rate. Option D is specific to tourism and not directly related to exchange rates.

A Fall in the Rand's Nominal Exchange Rate in Terms