The Real Exchange Rate and Relative Price of Non-Traded Goods.
Suppose that PPP does NOT hold.
- Explain the role of movements in the relative price of non-traded goods for real exchange rate fluctuations, using a simple decomposition of the real exchange rate into two parts to illustrate your answer.
- How does a real exchange rate depreciation, due to any source, affect equilibrium real income, the home equilibrium interest rate, and the home price level? Use diagrams to illustrate your answer.
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