A booming economy with a fixed or stable nominal exchange rate
A)inevitably brings about an appreciation of the real exchange rate.
B)inevitably brings about a depreciation of the real exchange rate.
C)inevitably brings about a stabilization of the real exchange rate.
D)inevitably brings about increased volatility of the real exchange rate.

Question

Quizplus · Accepted Answer

A booming economy will result in an increase in demand for the country's currency, which will lead to an appreciation of the nominal exchange rate. However, if the nominal exchange rate remains fixed, the increase in the nominal exchange rate will result in an increase in the real exchange rate, causing a loss of competitiveness in the country's exports and importing cheaper goods.

A Booming Economy with a Fixed or Stable Nominal Exchange