Consider an identical basket of goods in both the U.S. and India. For a given nominal exchange rate, in which case is it certain that the U.S. real exchange rate with India falls?
A)the price of the basket of goods rises in the U.S. and India.
B)the price of the basket of goods rises in the U.S. and falls in India.
C)the price of the basket of goods falls in the U.S. and rises in India.
D)the price of the basket of goods falls in both India and the U.S..

Question

Quizplus · Accepted Answer

If the price of the basket of goods falls in the U.S. and rises in India, it means that the Indian goods have become relatively cheaper compared to the U.S. goods. This leads to a fall in the U.S. real exchange rate with India because now it takes fewer U.S. dollars to buy the same basket of goods in India.

Consider an Identical Basket of Goods in Both the U