Question

Consider an identical basket of goods in both the U.S. and Taiwan. For a given nominal exchange rate, in which case is it certain that the U.S. real exchange rate with Taiwan falls? a. the price of the basket of goods falls in the U.S. and rises in Taiwan. b. the price of the basket of goods rises in the U.S. and falls in Taiwan. c. the price of the basket of goods falls in both the U.S. and Taiwan. d. the price of the basket of goods rises in the U.S. and Taiwan.

Answer 1

Answer:

The correct option here is A) when prices of goods falls in U.S and rises in Taiwan

Explanation:

The real exchange rate for U.S will fall when when the prices of its basket of goods decreases and with this its nominal exchange rate also falls and this would mean that the value of U.S. currency has fallen relative to the Taiwan's currency and the prices of basket of goods rises in the Taiwan.