Question

Suppose that the real exchange rate between the United States and Brazil is defined in terms of baskets of goods. Other things the same, which of the following will increase the real exchange rate (that is increase the number of baskets of Brazilian goods a basket of U.S. goods buys)?

a) an increase in the quantity of Brazilian currency that can be purchased with a dollar
b) a decrease in the price of U.S. goods
c) an increase in the price in Brazilian currency of Brazilian goods
d) All of the above are correct.

Answer 1

Answer: an increase in the quantity of Brazilian currency that can be purchased with a dollar.

Explanation: An increase in the price of the Brazilian currency in relation to the dollar will increase the real exchange rate. This is because the exchange rate tells the amount of Brazilian baskets a US basket can buy.

The best option to relate the exchange rate with is an increase in the purchasing power of the dollar.