An increase in nontradables prices causes the real exchange rate (RER)to:
A) appreciate.
B) depreciate.
C) remain unchanged.
D) equal the nominal exchange rate.

Question

Quizplus · Accepted Answer

An increase in nontradables prices domestically makes domestic goods relatively more expensive compared to foreign goods. This increases the real value of the domestic currency relative to foreign currencies, leading to an appreciation of the real exchange rate (RER).

An Increase in Nontradables Prices Causes the Real Exchange Rate