Suppose the U.S. dollar depreciates nominally against the Mexican peso by 5%. The price level in the United States increases by 7%, but Mexico's price level does not change. From this we can conclude that:

Question

Quizplus · Accepted Answer

Even though the U.S. dollar depreciated against the Mexican peso, the inflation rate in the United States was higher than the inflation rate in Mexico. As a result, the relative price of U.S. goods increased compared to Mexican goods, making U.S. goods more expensive for Mexican consumers. This means that the real exchange rate for the United States appreciated, making U.S. goods relatively less competitive in international markets.