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Unformatted text preview: o Recall the definition for the real exchange rate: o e = e nom * P/P F o Assume e nom is 4 euros per dollar o P = $200 o P F = 1600 euros o e is 4 * $200/1600 = 0.50 o Now assume the domestic price level falls to $150 o e is 4 * 150/1600 = 0.375 o the real exchange rate falls o this means one unit of domestic goods buys fewer units of foreign goods o so, the demand for domestic goods increases...
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This note was uploaded on 10/21/2010 for the course ECON 102 taught by Professor ? during the Fall '08 term at Waterloo.
- Fall '08