If all countries produce the same good (or the same set of goods)and goods are freely traded among countries,so that the real exchange rate equals one,then the relationship between domestic and foreign prices and the nominal exchange rate is

Question

Quizplus · Accepted Answer

In a situation where all countries produce the same good and goods are freely traded with a real exchange rate of one, the relationship between domestic and foreign prices and the nominal exchange rate can be expressed as P = PFor / enom, where P is the domestic price, PFor is the foreign price, and enom is the nominal exchange rate. This equation implies that if the nominal exchange rate is higher, domestic prices will be lower and foreign prices will be higher, and vice versa. Therefore, choice A is the correct answer.

If All Countries Produce the Same Good (Or the Same