Consider an identical basket of goods in both the U.S.and Taiwan.For a given nominal exchange rate,in which case is it certain that the U.S.real exchange rate with Taiwan falls?
A)the price of the basket of goods rises in the U.S.and Taiwan.
B)the price of the basket of goods rises in the U.S.and falls in Taiwan.
C)the price of the basket of goods falls in the U.S.and rises in Taiwan.
D)the price of the basket of goods falls in both the U.S.and Taiwan.

Question

Quizplus · Accepted Answer

If the price of the basket of goods falls in the US, it means that the US dollar can now buy more of the same basket of goods in the US. If at the same time, the price of the basket of goods rises in Taiwan, it means that the Taiwanese dollar can now buy less of the same basket of goods in Taiwan. This implies that the US real exchange rate with Taiwan has fallen. Therefore, option C is the correct answer.

Consider an Identical Basket of Goods in Both the U