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If New Zealand's inflation rate is 25% inflation vs 15% inflation in our trading partners and the $NZ depreciates by 5% then Select one: a.the real exchange rate cannot be calculated. b.the real exchange rate is unchanged. c.the real exchange rate falls. d.the real exchange rate rises.

If New Zealand's inflation rate is 25% inflation vs 15% inflation in our trading partners and the $NZ depreciates by 5% then Select one: a.the real exchange rate cannot be calculated. b.the real exchange rate is unchanged. c.the real exchange rate falls. d.the real exchange rate rises.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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If New Zealand's inflation rate is 25% inflation vs 15% inflation in our trading partners and the $NZ depreciates by 5% then

Select one:
a.the real exchange rate cannot be calculated.
b.the real exchange rate is unchanged.
c.the real exchange rate falls.
d.the real exchange rate rises.
Expert Solution
Step 1

The real exchange rate is an inflation-adjusted exchange rate.

As per PPP theory

Real exchange rate=nominal exchange rate*(1+ foreign inflation)/(1+ Domestic inflation)

 

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