In equilibrium, according to the Balassa-Samuelson effect, the real exchange rate is:
A) always equal to 1.
B) never equal to 1.
C) often equal to 1.
D) not necessarily equal to 1.

Question

Quizplus · Accepted Answer

The Balassa-Samuelson effect suggests that in equilibrium, the relative price of non-traded goods between countries with different productivity levels affects the real exchange rate. This means that the real exchange rate may not necessarily be equal to 1, as it depends on the productivity levels and relative prices of non-traded goods in the two countries.

In Equilibrium, According to the Balassa-Samuelson Effect, the Real Exchange