Germany has a higher rate of inflation than Japan.The nominal exchange rate is constant.In this scenario,which of the following statement is true?
A) Germany experiences an increase in its real exchange rate.
B) Germany experiences a decrease in its real exchange rate.
C) Japan experiences an increase in its real exchange rate.
D) German goods are cheaper now.

Question

Quizplus · Accepted Answer

With a higher inflation rate in Germany compared to Japan and a constant nominal exchange rate, the real value of the German currency in terms of goods and services it can purchase relative to the Japanese currency decreases. This means that the real exchange rate, which adjusts the nominal rate for price level changes, increases for Germany, making German goods relatively more expensive compared to Japanese goods.

Germany Has a Higher Rate of Inflation Than Japan