If purchasing-power parity between France and the U.S.holds,but then U.S.prices rise,
A)the real exchange rate is above its purchasing-power parity value.An increase in the nominal exchange rate can move it back.
B)the real exchange rate is above its purchasing-power parity value.A decrease in the nominal exchange rate can move it back.
C)the real exchange rate is below its purchasing-power parity value.An increase in the nominal exchange rate can move it back.
D)the real exchange rate is below its purchasing-power parity value.A decrease in the nominal exchange rate can move it back.

Question

Quizplus · Accepted Answer

If the purchasing-power parity between France and the U.S. holds, but U.S. prices rise, then the real exchange rate is above its purchasing-power parity value. A decrease in the nominal exchange rate can move it back towards the purchasing-power parity value. This is because a decrease in the nominal exchange rate means that it takes fewer U.S. dollars to purchase one euro, which makes U.S. goods relatively cheaper compared to French goods, and can help to restore the balance of trade between the two countries.

If Purchasing-Power Parity Between France and the U