If the nominal exchange rate rises and price levels stay constant, the real exchange rate will
A) rise.
B) fall.
C) stay constant.
D) could rise, fall or stay constant.

Question

Quizplus · Accepted Answer

When the nominal exchange rate rises (meaning the domestic currency depreciates or you need more of the domestic currency to buy a unit of foreign currency) and the price levels stay constant, the real exchange rate will rise. This is because the real exchange rate adjusts the nominal rate by the relative prices of a basket of goods in the two countries, and if those prices stay constant but the nominal rate changes, the real rate will move in the direction of the nominal rate change.

If the Nominal Exchange Rate Rises and Price Levels Stay