Question : The real exchange rate is important for:
Option 1: International trade.
Option 2: Domestic monetary policy.
Option 3: Foreign direct investment.
Option 4: All of the above.
Correct Answer: All of the above.
Solution : The correct answer is (d) All of the above.
The real exchange rate plays a crucial role in international trade, as it determines the relative prices of goods and services between countries. It affects the competitiveness of domestic goods in the international market, which can impact a country's export and import levels.
Additionally, the real exchange rate is relevant to domestic monetary policy. Changes in the real exchange rate can influence a country's inflation rate, interest rates, and overall macroeconomic conditions. Central banks often consider the real exchange rate when formulating monetary policy to manage inflation and promote economic stability.
Furthermore, the real exchange rate can also impact foreign direct investment (FDI). A favorable real exchange rate can make a country's assets and investments more attractive to foreign investors, potentially increasing the inflow of FDI.
