Interpreting the Real Exchange Rate: Australia vs. US Example

Real Exchange Rate Notation (cc)

Formula for the Real Exchange Rate

Real Depreciation

Real Appreciation

Importance of the Nominal vs. Real Exchange Rate Distinction

Impact of Exchange Rate Fluctuations on Import Prices and Inflation

Fixed Nominal Exchange Rates Do Not Imply Fixed Real Exchange Rates

Suppose that over a one-year period, the currency of Country H (the home country) weakens by 5% relative to the currency of Country F (the foreign country). In that same year, the general price level of goods in Country H rises by 8%, while the price level in Country F rises by only 1%. Based on this information, how has the cost of a typical basket of goods from Country F changed relative to a basket of goods from Country H?

Central Bank Policy and International Competitiveness

Exporter's Dilemma

Evaluating a Fixed Currency Policy

If a country's currency experiences a 5% nominal appreciation, but its domestic inflation rate is 7% lower than its trading partners' inflation rate over the same period, the country's international competitiveness will have improved.

Match each economic scenario with its most likely impact on the home country's real exchange rate and its international competitiveness. Assume the real exchange rate is defined as the relative price of foreign goods in terms of domestic goods.

Competitiveness with a Fixed Currency Price

Imagine the currency exchange rate between Country A (the domestic country) and Country B (the foreign country) is fixed and does not change over a year. During this period, the general price level in Country A increases by 10%, while the price level in Country B increases by only 2%. Based on this information, what is the most likely effect on the international competitiveness of goods produced in Country A?

Suppose the nominal exchange rate between the US Dollar (USD) and the Euro (EUR) is 1.20 USD per EUR. A representative basket of goods costs 150 USD in the United States and 110 EUR in the Eurozone. From the perspective of the United States, the real exchange rate is ____. (Round your answer to two decimal places).

A country's international competitiveness is observed to have worsened. Arrange the following statements into the most logical causal sequence that explains this outcome, assuming the currency's value in the foreign exchange market has remained stable.

Importance of Distinguishing Between Nominal and Real Exchange Rates