Question : Which exchange rate is used to compare the purchasing power of different countries?
Option 1: Nominal exchange rate.
Option 2: Real exchange rate.
Option 3: Spot exchange rate.
Option 4: Forward exchange rate.
Correct Answer:
Real exchange rate.
Solution : The correct answer is (b) Real exchange rate.
The real exchange rate is used to compare the purchasing power of different countries. It takes into account not only the nominal exchange rate (the rate at which one currency can be exchanged for another) but also the relative price levels of goods and services between countries. The real exchange rate adjusts for differences in inflation rates between countries, providing a more accurate measure of the purchasing power of currencies.
