Question : An increase in the nominal exchange rate can be caused by:
Option 1: Lower interest rates in the domestic economy.
Option 2: Higher inflation rates in the domestic economy.
Option 3: Lower inflation rates in the domestic economy.
Option 4: Government intervention in the foreign exchange market.
Correct Answer: Higher inflation rates in the domestic economy.
Solution : The correct answer is (b) Higher inflation rates in the domestic economy.
When a country experiences higher inflation rates compared to its trading partners, it erodes the purchasing power of its currency. This can lead to a decrease in the value of the domestic currency relative to other currencies, resulting in an increase in the nominal exchange rate.
Question : The real exchange rate is calculated by:
Question : A decrease in the real exchange rate implies:
Question : In a floating exchange rate system, the exchange rate is determined by market forces, and fluctuations in the rate are caused by changes in ________.
Question : What is the term used to describe the rate at which a central bank buys or sells its own currency in the foreign exchange market?
Question : An increase in the nominal exchange rate indicates:
Regular exam updates, QnA, Predictors, College Applications & E-books now on your Mobile