Question

If the real exchange rate increases [(Es/euros)"(PEurope)/Pu.s.), U.S. exports to Europe__and U.S. imports from Europe increase; decrease decrease; decrease decrease; increase increase; increase

Answer 1

Option A is correct.

From the formula given, the real exchange rate is equal to the nominal exchange rate times the domestic price of the item divided by the foreign price of the item, we get to know either U.S is a domestic country or Europe. Here, Europe is a domestic country while U.S. is the foreign country.

It measures the price of foreign goods relative to the price of domestic goods. When real exchange rate is high, the relative price of goods at home country is higher than the relative price of goods abroad. So the case is, imports are likely because foreign goods are cheaper, in real terms, than domestic goods. Thus, when the real exchange rate increases, net exports decrease, and imports rise. It means Europe imports will increase and exports will decrease.

So as per the question when U.S. exports to Europe it becomes imports for Europe which will increase and U.S. imports are the Europe exports which will decrease.