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.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
If New Zealand's inflation rate is 25% inflation vs 15% inflation in our trading partners and the $NZ
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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