Assume that the price level in the United States and in Mexico is 100 and that the nominal and real exchange rate is 10 pesos per dollar.If the price level in Mexico increases relative to the price level in the United States,then at the same nominal exchange rate

Question

Quizplus · Accepted Answer

When the price level in Mexico increases relative to the United States, the purchasing power of the peso decreases, and the real exchange rate between the two countries shifts in favor of the United States. This means that the dollar has experienced a real depreciation relative to the peso because it now buys fewer pesos in the new equilibrium.

Assume That the Price Level in the United States and in Mexico