If the nominal exchange rate falls 10 percent, the domestic price level rises 4 percent, and the foreign price level rises 6 percent, the real exchange rate will fall:

Question

Quizplus · Accepted Answer

The real exchange rate is calculated as the nominal exchange rate multiplied by the ratio of domestic prices to foreign prices:

Real exchange rate = Nominal exchange rate x (Domestic price level / Foreign price level)

Substituting the given values, we get:

Real exchange rate = (0.9) x (1.04/1.06) = 0.8679

This represents a fall of 8.21 percent from the initial value of 0.945 (which would be the real exchange rate if there were no changes in prices or nominal exchange rates). Rounding this to the nearest percent gives us a fall of 8 percent.

If the Nominal Exchange Rate Falls 10 Percent, the Domestic