Case Interview Prep

Category - Economics

The real exchange rate of currency is a determinant of how much a country exports and imports. According to the equation below, what is the effect of an increase in foreign prices on the real exchange rate?
Real Exchange Rate = Nominal Exchange Rate X Domestic Price
Foreign Price
  1. decreases it
  2. increases it
  3. no change
  4. dependent on the GDP
Explanation
Answer: A - An increase in foreign prices leads to a decrease in the real exchange rate.

Key Takeaway: The real exchange rate compares the prices of domestic goods and foreign goods in the domestic economy. If a container of Canadian goat cheese is twice as expensive as American goat cheese, the real exchange rate is 1/2 container of Canadian goat cheese per container of American goat cheese.
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