If the purchasing power of the dollar is always the same at home and abroad, then the nominal exchange rate defined as units of foreign currency per dollar decreases if the U.S. price level rises more than the price level in foreign countries.

Question

Quizplus · Accepted Answer

If the U.S. price level rises more than the foreign price level, the purchasing power of the dollar decreases, leading to a depreciation of the dollar, which means fewer units of foreign currency per dollar.

If the Purchasing Power of the Dollar Is Always the Same