Assuming no change in the nominal exchange rate,how will a higher rate of inflation in the United States relative to France affect the real exchange rate between the two countries? (Assume the United States 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 the United States relative to France will make US goods more expensive compared to French goods. This effectively appreciates the real exchange rate of the US dollar relative to the euro, as more euros are needed to buy the same amount of goods in the US, assuming the nominal exchange rate remains unchanged.

Assuming No Change in the Nominal Exchange Rate,how Will a Higher