Suppose country A pegs its nominal exchange rate to country B and that country A has a lower inflation rate than country B.In this situation,country A will experience

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A real depreciation occurs when the nominal exchange rate remains constant but the price level in the domestic country rises relative to the price level in the foreign country. In this case, country A has a lower inflation rate than country B, so the price level in country A will rise less than the price level in country B. This will lead to a real depreciation of the currency of country A.A better trade position occurs when a country's exports increase or its imports decrease. In this case, the real depreciation of the currency of country A will make its exports cheaper and its imports more expensive. This will lead to an increase in exports and a decrease in imports, resulting in a better trade position for country A.A reduction in the real exchange rate occurs when the real value of the domestic currency falls relative to the real value of the foreign currency. In this case, the real depreciation of the currency of country A will lead to a reduction in the real exchange rate.

Suppose Country a Pegs Its Nominal Exchange Rate to Country