Figure 32-2
-Refer to Figure 32-2.If the real exchange rate is .6,then there is a
A) surplus of 100 so the real exchange rate will fall.
B) surplus of 100 so the real exchange rate will rise.
C) shortage of 100 so the real exchange rate will fall.
D) shortage of 100 so the real exchange rate will rise.

Question

Figure 32-2 
-Refer to Figure 32-2.If the real exchange rate is .6,then there is a
A) surplus of 100 so the real exchange rate will fall. 
B) surplus of 100 so the real exchange rate will rise. 
C) shortage of 100 so the real exchange rate will fall. 
D) shortage of 100 so the real exchange rate will rise.

Quizplus · Accepted Answer

If the real exchange rate is .6, then it means that the foreign currency is relatively cheaper compared to the domestic currency. This would make exports relatively more expensive and imports relatively cheaper, leading to an increase in imports and a decrease in exports, resulting in a shortage of foreign currency. Therefore, the correct choice is (D) shortage of 100 so the real exchange rate will rise, as an increase in the real exchange rate will make the foreign currency relatively more expensive and reduce imports while increasing exports, leading to an equilibrium in the foreign exchange market.

Figure 32-2 -Refer to Figure 32-2.If the Real Exchange Rate Is .6,then