The Real Exchange Rate 3 . PPP: Exchange rate is determined by relative prices E = PH P . Real exchange rate approach; Relative price and real exchange rate ExPF qx PH E = P P PF What influences the real exchange rate?2. Consider the real-exchange rate approach. Suppose that Foreign output increased and that Home central bank changed its nominal money supply so that the relative price Pw'PF would NOT change. How did Home central bank change its nominal money supply: Increased or Decreased? What would the approach predict on Home currency: Appreciation, Depreciation, No change, or No clear prediction? Change in M3113 Prediction on CH3