If the U.S. real exchange rate is greater than 1, then there is the possiblity of arbitraging by buying foreign goods to sell in the U.S.

Question

Quizplus · Accepted Answer

If the U.S. real exchange rate is greater than 1, it means that foreign goods are relatively cheaper compared to domestic goods. This creates an opportunity for arbitrageurs to buy foreign goods at a lower price and sell them in the U.S. at a higher price, earning a profit. This arbitrage activity would eventually bring the real exchange rate back to equilibrium.

If the US Real Exchange Rate Is Greater Than 1, Then There