Consider an identical basket of goods in both Algeria and India.For a given nominal exchange rate,in which case is it certain that the Algerian real exchange rate with India falls?
A)the price of the basket of goods rises in Algeria and India.
B)the price of the basket of goods rises in Algeria and falls in India.
C)the price of the basket of goods falls in Algeria and rises in India.
D)the price of the basket of goods falls in both India and Algeria.

Question

Quizplus · Accepted Answer

The Algerian real exchange rate with India will fall if the price of the basket of goods falls in Algeria and rises in India. This is because the real exchange rate is the nominal exchange rate adjusted for the relative price levels between two countries. If the price of the basket of goods falls in Algeria and rises in India, then Algeria's goods have become relatively cheaper compared to India's goods, leading to a fall in the Algerian real exchange rate.

Consider an Identical Basket of Goods in Both Algeria and India.For