A country experiences a 3% appreciation in its nominal exchange rate. During the same period, its domestic inflation rate is 2%, while the inflation rate of its main trading partners is 7%.
Assuming all other things remain equal, what is the most likely outcome for the country’s Real Exchange Rate (RER) and its international export price competitiveness?
The RER appreciates, and export price competitiveness decreases.
The RER depreciates, and export price competitiveness increases.
The RER depreciates, and export price competitiveness decreases.
The RER appreciates, and export price competitiveness increases.
