Initially the nominal exchange rate between the South Korean won and the U.S. dollar is 950 won per dollar. If the nominal exchange rate increases to 1000 won per dollar and the U.S and Korean price levels do not change, the real exchange rate
A) is the same as before.
B) is greater than before.
C) is less than before.
D) More information is needed to answer the question.

Question

Quizplus · Accepted Answer

The real exchange rate increases because the nominal exchange rate has increased while the price levels in both countries remain unchanged. This means that the won has depreciated relative to the dollar, making U.S. goods more expensive in terms of Korean goods.

Initially the Nominal Exchange Rate Between the South Korean Won