Question
Economics Question on Foreign exchange market
Suppose massive capital outflows cause nominal exchange rate to depreciate by 10%. At the same time, foreign and domestic price levels rise by 5% and 20% respectively. What will be the approximate change in real exchange rate?
A
Depreciation by 2.5%
B
Depreciation by 5%
C
Appreciation by 25%
D
Depreciation by 25%
Answer
Depreciation by 2.5%
Explanation
Solution
The correct option is(A): Depreciation by 2.5%