Answer: 5%.

The correct answer is **B (5%)**. **Explanation:** The real exchange rate change is calculated using the formula: \[ (1 + \text{Nominal Appreciation}) \times \frac{(1 + \text{Foreign Inflation})}{(1 + \text{Domestic Inflation})} - 1 \] Substituting the given values: \[ (1 + 6\%) \times \frac{(1 + 2\%)}{(1 + 3\%)} - 1 = 1.06 \times \frac{1.02}{1.03} - 1 \approx 0.0497 \text{ or } 5\% \] Alternatively, using the approximate formula: \[ \text{Nominal Appreciation} + \text{Foreign Inflation} - \text{Domestic Inflation} = 6\% + 2\% - 3\% = 5\% \] **Why not A or C?** - **A (4%)** incorrectly applies the formula without adjusting for inflation rates properly. - **C (7%)** swaps the domestic and foreign inflation rates in the calculation, leading to an overestimation.

Author: LeetQuiz Editorial Team