Other things the same,which of the following would both increase the U.S.real exchange rate?
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

A higher price level in the U.S. would cause an increase in the exchange rate because it would make U.S. goods relatively more expensive compared to foreign goods. Similarly, a lower price level in Israel would cause an increase in the exchange rate because it would make Israeli goods relatively more expensive compared to U.S. goods. Therefore, either prices in the U.S. being higher or prices in Israel being lower would both lead to an increase in the U.S. real exchange rate.

Other Things the Same,which of the Following Would Both Increase