In order to bring about a real depreciation of the dollar, the U.S. can hope for
A) a rise in the U.S. price level.
B) a fall in foreign price levels.
C) a rise in the dollar's nominal value in terms of foreign currencies.
D) a rise in foreign price levels or a fall in the dollar's nominal value in terms of foreign currencies.
E) increased output and full employment.

Question

Quizplus · Accepted Answer

A real depreciation of the dollar means that it becomes less valuable in terms of purchasing power relative to foreign currencies. This can be achieved either by a rise in foreign price levels or a fall in the dollar's nominal value in terms of foreign currencies. Option A is incorrect as a rise in the U.S. price level would lead to inflation, not depreciation of the dollar. Option B is also incorrect as a fall in foreign price levels would lead to a real appreciation of the dollar. Option C is incorrect as a rise in the dollar's nominal value in terms of foreign currencies would lead to a real appreciation, not depreciation, of the dollar. Option E is irrelevant to the question.

In Order to Bring About a Real Depreciation of the Dollar