Exercise 6 The real exchange rate of the economy is defined as RERt  StP

t Pt , where St represents the nominal exchange rate, P

t the international price index, and Pt the domestic price index.

Explain how the real exchange rate changes in the following situations:

a. The government increases public spending.

b. A natural catastrophe devastates production in the rest of the world.

c. A technological shock increases domestic economic productivity in relation to the rest of the world.

d. Under what conditions would the real exchange rate be invariant in relation to the events cited in items

(a) and (b)?