If the Chinese government wants to keep the real and nominal exchange rates between the yuan and the Canadian dollar fixed at 8 yuan per dollar without government intervention in the foreign exchange market,the _____ rate in China must be _____ that in Canada.

Question

Quizplus · Accepted Answer

If the Chinese government wants to keep the real and nominal exchange rates between the yuan and the Canadian dollar fixed at 8 yuan per dollar without government intervention in the foreign exchange market, the inflation rate in China must be equal to that in Canada. This is because the real exchange rate is the nominal exchange rate adjusted for inflation, and if the real exchange rate is fixed, then the nominal exchange rate must move in line with inflation.

If the Chinese Government Wants to Keep the Real and Nominal