Which of the following would result in a real appreciation of the United States Dollar with respect ...........

Economics- Phase (I & II) Balance of Payment and Foreign Exchange Markets

Which of the following would result in a real appreciation of the United States Dollar with respect to the British Pound?

Increase in Dollar per Pound nominal exchange rate

Increase in Price Index of United Kingdom (Britain)

Increase in Price Index of United States

None of the Above

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Explanation:

Recall the definition of the real exchange rate

with P the domestic price, P* the foreign price, and E the nominal exchange rate. First note, that domestic here correspond to United States (because the currency we care about is United States Dollar). Increasing P result in increase in $\epsilon$ per the equation. It is clear that increase P* will have the opposite effect. A little tricky is that ‘Dollar per Pound nominal exchange rate’ is not E but 1/E. If I give you more dollar per pound, the USD faces a nominal deprecation.