Suppose that the real exchange rate between the United States and Zambia 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 Zambian goods a basket of U.S.goods buys)?
A)a decrease in the number of Zambian Kwacha that can be purchased with a dollar
B)a decrease in the price of U.S.baskets of goods
C)a decrease in the price in Zambian Kwacha of Zambian goods
D)None of the above is correct.

Question

Quizplus · Accepted Answer

A decrease in the price of Zambian goods in Zambian Kwacha will increase the purchasing power of a dollar in terms of Zambian goods, therefore increasing the real exchange rate. Option A would decrease the purchasing power of a dollar in terms of Zambian goods, decreasing the real exchange rate. Option B would affect the relative price between U.S. and Zambian goods, but would not directly affect the real exchange rate. Option D is incorrect as option C is correct.

Suppose That the Real Exchange Rate Between the United States