The real exchange rate of British pounds to Australian dollars will increase if the British price level ________ and the nominal exchange rate of pounds to the dollar ________.
A)increases; rises
B)decreases; rises
C)increases; falls
D)decreases; falls

Question

Quizplus · Accepted Answer

The real exchange rate increases when the domestic price level decreases or the nominal exchange rate (the value of the domestic currency in terms of the foreign currency) rises. This is because a decrease in the domestic price level makes domestic goods cheaper relative to foreign goods, and a rise in the nominal exchange rate means that the domestic currency can buy more of the foreign currency, making foreign goods relatively more expensive.

The Real Exchange Rate of British Pounds to Australian Dollars