If a real exchange rate appreciation occurs, which of the following results?
A) It takes more home goods to purchase the same quantity of foreign goods.
B) It takes fewer home goods to purchase the same quantity of foreign goods.
C) The nominal exchange rate has risen as well.
D) The nominal exchange rate has fallen.

Question

Quizplus · Accepted Answer

A real exchange rate appreciation means that the home country's goods have become relatively more expensive compared to foreign goods. This implies that fewer home goods are needed to purchase the same quantity of foreign goods, hence choice B is correct. The nominal exchange rate may or may not have changed as well, so choices C and D are not necessarily correct. Choice A is incorrect because it states the opposite of what happens during a real exchange rate appreciation.

If a Real Exchange Rate Appreciation Occurs, Which of the Following