Other things the same, which of the following would both increase the U.S. real exchange rate with Israel?
A)prices in the U.S. were higher, or prices in Israel were higher.
B)prices in the U.S were higher, or prices in Israel were lower.
C)prices in the U.S. were lower, or prices in Israel were higher.
D)prices in the U.S. were lower, or prices in Israel were lower.

Question

Quizplus · Accepted Answer

If prices in the U.S. were higher, American goods and services would become relatively more expensive compared to those in Israel, leading to a decrease in demand for U.S. goods and an increase in demand for Israeli goods. Similarly, if prices in Israel were lower, Israeli goods would become relatively cheaper, leading to an increase in demand for Israeli goods and a decrease in demand for American goods. Both of these scenarios would lead to an increase in the U.S. real exchange rate with Israel.

Other Things the Same, Which of the Following Would Both