For given domestic and foreign price levels,a decrease in the nominal exchange rate __________ the real exchange rate.

Question

Quizplus · Accepted Answer

A decrease in the nominal exchange rate means that it takes more domestic currency to purchase one unit of a foreign currency. This makes foreign goods relatively more expensive for domestic consumers, which makes imports less attractive and exports more attractive. As a result, the demand for domestic goods increases, while the demand for foreign goods decreases. This leads to an increase in the value of the domestic currency in terms of goods (the real exchange rate), which means that it takes fewer units of domestic currency to purchase a basket of goods. Therefore, a decrease in the nominal exchange rate leads to a decrease in the real exchange rate.

For Given Domestic and Foreign Price Levels,a Decrease in the Nominal