Suppose that the real exchange rate between the United States and Brazil is defined in terms of baskets of goods.Other things the same,which of the following will increase the real exchange rate (that is increase the number of baskets of Brazilian goods a basket of U.S.goods buys)?
A)an increase in the quantity of Brazilian currency that can be purchased with a dollar
B)a decrease in the price of U.S.goods
C)an increase in the price in Brazilian currency of Brazilian goods
D)All of the above are correct.

Question

Quizplus · Accepted Answer

An increase in the quantity of Brazilian currency that can be purchased with a dollar means that the exchange rate has increased, making Brazilian goods relatively cheaper. Therefore, this will increase the real exchange rate.

Choice B will not necessarily increase the real exchange rate as it only affects the price of U.S. goods and not Brazilian goods.

Choice C will actually decrease the real exchange rate as an increase in the price of Brazilian goods in Brazilian currency means that Brazilian goods have become relatively more expensive compared to U.S. goods.

Suppose That the Real Exchange Rate Between the United States