Which of the following,all else fixed,will cause the real exchange rate to increase?
A)a nominal depreciation
B)a reduction in the foreign price level
C)a reduction in the domestic price level
D)all of the above
E) none of the above

Question

Quizplus · Accepted Answer

A nominal depreciation (choice A) would cause the real exchange rate to decrease, as it makes domestic goods cheaper relative to foreign goods. A reduction in the domestic price level (choice C) would also cause the real exchange rate to decrease, as it makes domestic goods cheaper relative to foreign goods. However, a reduction in the foreign price level (choice B) would cause the real exchange rate to increase, as it makes foreign goods relatively more expensive compared to domestic goods. Therefore, the correct answer is B.

Which of the Following,all Else Fixed,will Cause the Real Exchange