Question

What three things cause the real exchange rate to increase?

a) Inflation, interest rates, and productivity
b) Supply, demand, and currency value
c) Government policy, consumer spending, and trade deficits
d) Economic growth, imports, and exports

Answer 1

Inflation, interest rates, and productivity are the three things that cause the real exchange rate to increase.

Step-by-step explanation:

The three things that cause the real exchange rate to increase are inflation, interest rates, and productivity.

Inflation: When a country experiences high inflation, the prices of goods and services increase. This makes the country's currency less valuable compared to other currencies, resulting in an increase in the real exchange rate.

Interest Rates: Higher interest rates attract foreign investors, who then need to exchange their currency for the local currency. This increased demand for the local currency leads to an appreciation in the real exchange rate.

Productivity: A country with higher productivity can produce more goods and services, making its currency more attractive. This increased demand for the currency leads to an increase in the real exchange rate.