Suppose that the real exchange rate between Canada and Kenya is defined in terms of baskets of goods. Which of the following will increase the real exchange rate (that is, increase the number of baskets of Kenyan goods a basket of Canadian goods buys)?
A)an increase in the number of Kenyan shillings that can be purchased with a dollar
B)an increase in the price in Canadian dollars of Kenyan goods
C)an increase in the price in Kenyan shillings of Kenyan goods
D)a decrease in the number of Kenyan shillings that can be purchased with a dollar

Question

Quizplus · Accepted Answer

An increase in the number of Kenyan shillings that can be purchased with a dollar means that the Canadian dollar has appreciated relative to the Kenyan shilling, making Canadian goods relatively more expensive and thus increasing the real exchange rate.

Suppose That the Real Exchange Rate Between Canada and Kenya