Question : The real exchange rate is calculated by:
Option 1: Dividing the nominal exchange rate by the inflation rate.
Option 2: Multiplying the nominal exchange rate by the inflation rate.
Option 3: Adding the inflation rate to the nominal exchange rate.
Option 4: Subtracting the inflation rate from the nominal exchange rate.
Correct Answer: Dividing the nominal exchange rate by the inflation rate.
Solution : The correct answer is (a) Dividing the nominal exchange rate by the inflation rate.
The real exchange rate is calculated by adjusting the nominal exchange rate for differences in the inflation rates between two countries. It reflects the relative purchasing power of two currencies and measures the amount of goods and services that can be exchanged between two countries. By dividing the nominal exchange rate by the inflation rate, you are effectively removing the inflationary impact on the exchange rate and obtaining a measure of the real purchasing power of the currencies.
Question : What is the term used to describe the difference between the nominal exchange rate and the inflation rate between two countries?
Question : Which exchange rate is used to compare the purchasing power of different countries?
Question : What is the term used to describe the exchange rate between two currencies that does not involve the U.S. dollar?
Question : What is the term used to describe the rate at which a currency can be exchanged immediately in the spot market?
Question : What is the term used to describe the rate at which one currency can be exchanged for another immediately, without any delay?
Regular exam updates, QnA, Predictors, College Applications & E-books now on your Mobile