Suppose that the real exchange rate between the United States and Vietnam is defined in terms of baskets of goods. Other things the same, which of the following will increase the real exchange rate (that is increase the number of baskets of Vietnamese goods a basket of U.S. goods buys)?
A)an increase in the quantity of Vietnamese currency that can be purchased with a dollar
B)an increase in the price of U.S. baskets of goods
C)a decrease in the price in Vietnamese currency of Vietnamese goods
D)All of the above are correct.

Question

Quizplus · Accepted Answer

An increase in the quantity of Vietnamese currency that can be purchased with a dollar will increase the real exchange rate because it will make Vietnamese goods cheaper relative to U.S. goods. An increase in the price of U.S. baskets of goods will also increase the real exchange rate because it will make U.S. goods more expensive relative to Vietnamese goods. A decrease in the price in Vietnamese currency of Vietnamese goods will also increase the real exchange rate because it will make Vietnamese goods cheaper relative to U.S. goods.

Suppose That the Real Exchange Rate Between the United States