19. If the nominal exchange rate falls 10 percent, the domestic price level rises 4 percent,...

Question

Question

19. If the nominal exchange rate falls 10 percent, the domestic price level rises 4 percent, and the foreign price level rise

Answer 1

Answer #1

Percentage change in the nominal exchange rate = % Change in real exchange rate + % Change in foreign price level - % Change in domestic price level

Or, (-10) = % change in real exchange rate + 6 - (+4)

Or, % change in real exchange rate = -10 -6+4 = -12

That is, real exchange rate decreases by 12%

Answer: option D

Answer 2

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