Assuming no change in the nominal exchange rate, how will a lower rate of inflation in the United States relative to Canada affect the real exchange rate between the two countries? (Assume Canada is the "domestic" country.)
A)The real exchange rate will rise.
B)The real exchange rate will fall.
C)The real exchange rate will be unaffected.
D)The impact on the real exchange rate cannot be predicted.

Question

Quizplus · Accepted Answer

A lower rate of inflation in the United States relative to Canada means that the purchasing power of the US dollar increases relative to the Canadian dollar. This will lead to an increase in the real exchange rate between the two countries, as more Canadian goods and services will be demanded by US consumers, while fewer US goods and services will be demanded by Canadian consumers.

Assuming No Change in the Nominal Exchange Rate, How Will