What determines the real exchange rate and the nominal exchange rate in the long run?
What will be an ideal response?
In the long run, the real exchange rate is determined by demand and supply in the goods market. Identical goods in the United States and Japan sell for the same price once adjusted for the (nominal) exchange rate. The relative prices of goods that are not identical are determined by the supply and demand for them and so the relative price levels in different countries are determined by supply and demand. These relative price levels determine the real exchange rate.
In the long run, changes in the real exchange rate and changes in the price levels change the nominal exchange rate. In the long run, the price level is determined by the quantity of money. So changes in the U.S. or the Japanese quantity of money change the price level and also bring an offsetting change in the nominal exchange rate.
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A) a negative externality is created by the schools. B) a positive externality is created by the schools. C) no externality is created by the schools. D) an externality is created that may be positive or negative.