The real exchange rate of currency is a determinant of how much a country exports and imports. According to the equation below, what is the effect of an increase in foreign prices on the real exchange rate? Real Exchange Rate = Nominal Exchange Rate X Domestic Price
Foreign Price
A)decreases it
B)increases it
C)no change
D)dependent on the GDP

Question

Quizplus · Accepted Answer

An increase in foreign prices leads to a decrease in the real exchange rate.
Key Takeaway: The real exchange rate compares the prices of domestic goods and foreign goods in the domestic economy. If a container of Canadian goat cheese is twice as expensive as American goat cheese, the real exchange rate is 1/2 container of Canadian goat cheese per container of American goat cheese.

The Real Exchange Rate of Currency Is a Determinant of How