Which of the following,all else fixed,will cause the real exchange rate to decrease?
A)a nominal appreciation
B)an increase in the foreign price level
C)an increase in the domestic price level
D)all of the above
E) none of the above

Question

Quizplus · Accepted Answer

According to the definition of real exchange rate, it equals the nominal exchange rate adjusted for the relative price of domestically produced goods to foreign-produced goods. Therefore, an increase in the foreign price level will cause the real exchange rate to decrease, as domestic goods become relatively cheaper compared to foreign goods. A nominal appreciation (choice A) or an increase in the domestic price level (choice C) would both lead to an increase in the real exchange rate. Therefore, choices A and C can be eliminated. Choice D is also incorrect since it includes all three options, whereas only choice B is correct.

Which of the Following,all Else Fixed,will Cause the Real Exchange