The domestic currency experiences real appreciation

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Suppose P (domestic price) and P* (foreign price) are both increasing. Now suppose that the dollar experiences a 5% nominal depreciation.

a. Which country is experiencing the higher rate of inflation if the domestic currency experiences a real appreciation? Briefly explain.

b. Which country is experiencing the higher rate of inflation is the domestic currency experiences a real depreciation? Briefly explain.

c. Compare the changes in P and P* if the real exchange rate does not change.

Reference no: EM132049251

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