Suppose absolute purchasing power holds true between two countries, Home and Foreign, and

the price level increases $4\%$ in Home and it decreases by $2\%$ in Foreign.

$($a$.)$ What happens to the price of Foreign$$s currency in terms of Home$$s currency?

$($b$.)$ What is the real exchange rate, defined as the price of one unit of the foreign basket of goods

in terms of units of the domestic basket of goods?

Answer rating: 100% (QA)

a With the price level increasing by 4 in Home and d... View the full answer