The real exchange rate between the Canadian dollar and the Canadian dollar will remain constant if an increase in the value of the Canadian dollar against the Canadian dollar is offset by:

Question

Quizplus · Accepted Answer

An increase in the value of the Canadian dollar against the Canadian dollar (which is basically a no-op) would only affect the real exchange rate if there is inflation. Since real exchange rate is a measure of purchasing power, an increase in the value of Canadian dollar against Canadian dollar (which means 1 CAD still equals 1 CAD) would mean Canadian goods have become relatively more expensive for Canadians, which should only happen because of inflation. Therefore, an increase in the value of the Canadian dollar against the Canadian dollar would need to be offset by inflation in Canada to keep the real exchange rate constant.

The Real Exchange Rate Between the Canadian Dollar and the Canadian