Suppose that the nominal exchange rate between the U.S.dollar and the Mexican peso is 0.10 dollars per peso.If Mexico's inflation is 10 percent and the United States' inflation is 0 percent,from the U.S.point of view,the real exchange rate
A)appreciates to 0.11 dollars per peso.
B)depreciates to 0.11 dollars per peso.
C)appreciates to 0.09 dollars per peso.
D)depreciates to 0.09 dollars per peso.

Question

Quizplus · Accepted Answer

The real exchange rate is the nominal exchange rate adjusted for differences in inflation rates. In this case, because Mexico has a higher inflation rate than the United States, the real value of the peso decreases faster than the nominal exchange rate. Therefore, the real exchange rate from the US point of view will depreciate (i.e., it will take more US dollars to buy one peso) and will be 0.11 dollars per peso.

Suppose That the Nominal Exchange Rate Between the U