A French professor who spends most summers in Paris, was excitedly telling me how the euro/dollar exchange rate had gone to 1 euro per dollar from 1.2 euros per dollar. He had concluded that his summer would cost much less. Yet during the same time that the value of the euro fell, prices in France had increased about 20 percent faster than in the United States. In actuality, then, nothing about the cost of his summer had changed. He could get more euros for each dollar, but the cost of living had increased by the same amount.

This situation exemplifies the fact that real exchange rates are what determine purchasing power, not nominal exchange rates. News articles, currency exchange kiosks, and banks almost always quote nominal exchange rates between two currencies.

Can you explain why there was no change in the real exchange rate in this euro/dollar example?