To analyze which option would cause the real exchange rate to rise, we need to consider how the real exchange rate is influenced by both the demand for goods and services and the real interest rate.
The real exchange rate can be interpreted as the relative price of domestic goods in terms of foreign goods. When the real exchange rate rises, it implies that U.S. goods have become more expensive relative to foreign goods, or that foreign goods have become cheaper relative to U.S. goods.
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An increase in foreign demand for U.S. goods and services: This would typically put upward pressure on the real exchange rate because as foreign buyers demand more U.S. goods, they need to exchange more of their currency for U.S. dollars, leading to an appreciation of the dollar.
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An increase in the U.S. real interest rate: A higher real interest rate makes U.S. financial assets more attractive, leading to an inflow of capital. This inflow can cause the dollar to appreciate against foreign currencies, again contributing to a rise in the real exchange rate.
Now, let's evaluate each option:
a. An increase in foreign demand for U.S. goods and services, but not an increase in the U.S. real interest rate. - This would likely cause the real exchange rate to rise due to increased demand for U.S. goods.
b. Neither an increase in the U.S. real interest rate nor an increase in the demand for U.S. goods and services. - This would not cause the real exchange rate to rise; it would remain the same.
c. An increase in the real interest rate, but not an increase in foreign demand for U.S. goods and services. - This could lead to a rise in the real exchange rate due to capital inflows attracted by the higher interest rate.
d. Both an increase in the real interest rate and an increase in foreign demand for U.S. goods and services. - This would certainly cause the real exchange rate to rise, as both factors contribute to the appreciation of the dollar.
Considering the above analyses, options a, c, and d are all potential causes for the real exchange rate to rise. However, the strongest effect would be captured in option d, where both factors are at play.
Therefore, the best answer is:
d. Both an increase in the real interest rate and an increase in foreign demand for U.S. goods and services.