Suppose that the euro depreciates against the dollar. Assuming all other factors remain constant, the real exchange rate of euros to Australian dollars will:
A)increase.
B)decrease.
C)increase and then decrease.
D)remain constant.

Question

Quizplus · Accepted Answer

If the euro depreciates against the dollar, it means that it will now take more euros to buy the same amount of dollars. This will, in turn, make European exports cheaper for US consumers compared to those from Australia, causing an increase in demand for European goods, driving up the value of the euro against the Australian dollar. Therefore, the real exchange rate of euros to Australian dollars will decrease.

Suppose That the Euro Depreciates Against the Dollar