Holding nominal exchange rates constant,if inflation in Europe exceeds inflation in the United States,
A)the real exchange rate ($/€)will rise, and the euro will buy more in the U.S.
B)the real exchange rate ($/€)will rise, and the euro will buy less in the U.S.
C)the real exchange rate ($/€)will fall, and the euro will buy more in the U.S.
D)the real exchange rate ($/€)will fall, and the euro will buy less in the U.S.

Question

Quizplus · Accepted Answer

If inflation in Europe exceeds inflation in the United States, the euro will become cheaper relative to the dollar, making the real exchange rate ($/€) rise. This means that the euro will buy less in the U.S.

Holding Nominal Exchange Rates Constant,if Inflation in Europe Exceeds Inflation