What is happening to the Georgian real exchange rate in each of the following situations? Explain. a) (4 points) Georgian nominal exchange rate is unchanged, but prices rise faster in Georgia than abroad. b) (4 points) Georgian nominal exchange rate declines, and prices are unchanged in Georgia and abroad. c) (4 points) Georgian nominal exchange rate declines, and prices rise faster abroad than in Georgia. d) (4 points) Prices in Georgia decline and purchasing power parity holds. e) (4 points) Prices abroad increase and purchasing power parity holds.
a) The real exchange rate increases
Explanation: The real exchange rate will be computed as the nominal
exchange rate times the domestic price level divided with the price
level in foreign.
Real Exchange Rate = [(Nominal exchange rate) * (Price of the good
1 abroad / Price of good 1 at home)]
The real exchange rate increases because the domestic price will be
the multiplying factor in the formula
b) The real exchange rate falls
Explanation: The real exchange rate falls because the nominal
exchange value is the multiplying factor that causes a fall in the
entire value
c) The real exchange rate falls
Explanation: The dividing factor is increasing and multiplying
factor is declining, as a result the real exchange rate falls
d) The real exchange rate remains constant
Explanation: When PPP holds the real exchange rate remains
constant
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