Question : The real exchange rate is a measure of:
Option 1: Purchasing power of one currency relative to another.
Option 2: Exchange rate fluctuations in the short term.
Option 3: The value of a currency in terms of gold.
Option 4: Speculative movements in the foreign exchange market.
Correct Answer:
Purchasing power of one currency relative to another.
Solution : The correct answer is (a) Purchasing power of one currency relative to another.
The real exchange rate is a measure of the purchasing power of one currency in relation to another currency. It takes into account the nominal exchange rate and adjusts it for differences in inflation rates between the two countries. The real exchange rate reflects the actual purchasing power of a currency in terms of goods and services.
A higher real exchange rate indicates that a currency has greater purchasing power, meaning it can buy more goods and services compared to another currency. Conversely, a lower real exchange rate implies reduced purchasing power.
The real exchange rate is an important indicator for assessing the competitiveness of a country's goods and services in the international market. It affects international trade flows and can impact a country's exports and imports.
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