The final market price of imports may not reflect 100% of changes in the real effective exchange rate because:
A) exchange rates in many nations are fixed.
B) there are restrictions on capital inflows.
C) domestic price distortions, such as markups or taxes, reduce the impact of the exchange rate change.
D) the government has instituted price controls.

Question

Quizplus · Accepted Answer

Domestic price distortions, such as markups or taxes, reduce the impact of the exchange rate change, therefore the final market price of imports may not reflect 100% of changes in the real effective exchange rate. This is because these price distortions affect the final price that the consumer pays for the imported good, making it less sensitive to exchange rate changes. Options A, B, and D are not relevant to the given scenario, as they do not directly address the impact of price distortions on the final market price of imports.

The Final Market Price of Imports May Not Reflect 100