Suppose that the real exchange rate between the United States and Kenya is defined in terms of baskets of goods. Other things the same, which of the following will increase the real exchange rate?
A)a decrease in the quantity of Kenyan currency that can be purchased with a dollar
B)a decrease in the price of U.S. baskets of goods
C)a decrease in the price in Kenyan currency of Kenyan goods.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

A decrease in the price in Kenyan currency of Kenyan goods means that the basket of Kenyan goods becomes cheaper in terms of Kenyan currency, leading to an increase in the purchasing power of the Kenyan currency. This would lead to an increase in the real exchange rate between the two countries.

Suppose That the Real Exchange Rate Between the United States