State the impact of each of the following changes (other variables remaining unchanged) on the real exchange rate. (a) The Consumer Price Index (which measures the price level) in the United States rises by 4 percent. (b) The Consumer Price Index in Jamaica rises by 9 percent. (c) The two Consumer Price Index changes above occur at the same time.
State the impact of each of the following changes (other variables remaining unchanged) on the real exchange rate.
(a) The
(b) The Consumer Price Index in Jamaica rises by 9 percent.
(c) The two Consumer Price Index changes above occur at the same time.
The real-effective exchange rate is calculated by taking the ratio of foreign(Pf) to domestic(P) prices multiplied with the nominal exchange rate – e.
This R measures the competitiveness of domestic commodities in international trade. The rise in R – represents a real depreciation of the domestic currency which states that the goods in the foreign markets are relatively costlier in comparison to the good in the home country. This implies domestic goods are becoming more competitive in foreign markets. Whereas, the fall in R – implies that our goods are losing their competitiveness.
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