1. If domestic inflation is lower than foreign inflation, but the domesticcountry has a fixed exchange rate, What happens to the real exchange rate over time?

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Originally Posted by W156

1. If domestic inflation is lower than foreign inflation, but the domesticcountry has a fixed exchange rate, What happens to the real exchange rate over time?

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We don't do your homework assignments... but if you give us your answer first.. we can critique it.

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Originally Posted by smoothy

We don't do your homework assignments... but if you give us your answer first.. we can critique it.

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Fixed exchange rate>>no change in nominal exchange rate
Real exchange rate will decrease? Thanks

Could anyone please explain clearly the difference between fixed exchange rate and flexible exchange rate? In relation to fiscal policy, depreciation, adjustment of interest rate and the impacts etc

The value of a fixed exchange rate fluctuates only in relation to the value of the currency it is fixed against, a flexible exchange rate is subject to market value fluctuations based on the demand for the currency, etc

The impacts of a flexiable exchange rate can be a short term decline in the terms of trade which have impacts on internal prices such as the price of imported goods