Assuming no change in the nominal exchange rate, how will a higher rate of inflation in Canada relative to France affect the real exchange rate between the two countries? (Assume Canada is the "domestic" country.)
A)The real exchange rate will rise.
B)The real exchange rate will fall.
C)The real exchange rate will be unaffected.
D)The impact on the real exchange rate cannot be predicted.

Question

Quizplus · Accepted Answer

A higher rate of inflation in Canada relative to France will make Canadian goods more expensive compared to French goods. This effectively appreciates the real exchange rate of Canada relative to France, as the nominal exchange rate remains unchanged but the purchasing power in Canada decreases relative to France.

Assuming No Change in the Nominal Exchange Rate, How Will