Initially the exchange rate between the South Korean won and the Canadian dollar is 950 won per dollar. If the exchange rate rises to 1,000 won per dollar and the Canadian and South Korean price levels do not change, then in the short run the real exchange rate
A)rises.
B)falls.
C)does not change.
D)either rises, falls, or remains the same but we don't know for sure.
E)is 1,000 won per dollar.

Question

Quizplus · Accepted Answer

An increase in the exchange rate (from 950 to 1,000 won per dollar) means that the South Korean won has appreciated relative to the Canadian dollar. In the short run, assuming that prices do not change, this means that South Korean goods have become relatively more expensive than Canadian goods. As a result, the real exchange rate (which is the nominal exchange rate adjusted for relative prices) has increased, indicating an appreciation of the South Korean won.

Initially the Exchange Rate Between the South Korean Won and the Canadian