Suppose that the nominal exchange rate is 120 yen per dollar,that the price of a basket of goods in the U.S.is $500 and the price of a basket of goods in Japan is 50,000 yen.Suppose that these values change to 100 yen per dollar,$600,and 70,000 yen.Then the real exchange rate would
A) appreciate which by itself would make U.S.net exports fall.
B) appreciate which by itself would make U.S.net exports rise.
C) depreciate which by itself would make U.S.net exports fall.
D) depreciate which by itself would make U.S.net exports rise.

Question

Quizplus · Accepted Answer

The real exchange rate is calculated as (nominal exchange rate * price level in domestic country) / price level in foreign country. Initially, it is (120 * 500) / 50,000 = 1.2. After the change, it is (100 * 600) / 70,000 = 0.857. The real exchange rate has depreciated, which typically makes U.S. goods cheaper relative to foreign goods, potentially increasing U.S. net exports.

Suppose That the Nominal Exchange Rate Is 120 Yen Per