An increase in the real exchange rate indicates that: Group of answer choices foreign goods are now relatively cheaper. foreign goods are now relatively more expensive. domestic goods are now relatively more expensive. both a. and c. are correct
Question
An increase in the real exchange rate indicates that: Group of answer choices
foreign goods are now relatively cheaper.
foreign goods are now relatively more expensive.
domestic goods are now relatively more expensive.
both a. and c. are correct
Solution
To answer the question step by step, let's break down the concept of the real exchange rate and its implications:
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Understanding the Real Exchange Rate: The real exchange rate measures the relative price of domestic goods to foreign goods. It adjusts the nominal exchange rate by the price levels of the two countries.
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Increase in the Real Exchange Rate: When the real exchange rate increases, it means that domestic goods have become more expensive relative to foreign goods. This can be due to either an increase in the nominal exchange rate (domestic currency depreciates) or higher domestic price levels compared to foreign price levels.
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Implications:
- Foreign Goods: Since the real exchange rate has increased, foreign goods are now relatively cheaper compared to domestic goods.
- Domestic Goods: Conversely, domestic goods are now relatively more expensive compared to foreign goods.
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Conclusion: Based on the above analysis, the correct answer is that both foreign goods are now relatively cheaper and domestic goods are now relatively more expensive.
Therefore, the correct choice is:
- both a. and c. are correct
Similar Questions
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