49. Exchange rates

Question 1

Define nominal exchange rate and give an example

Answer 1

The price of one currency in terms of another
1$ = 84₹

Question 2

Define real exchange rate

Answer 2

the value of a country’s goods against those of another country

Question 3

Formula for real exchange rate

Answer 3

RER = Nominal exchange rate * domestic price/foreign price

nominal * CPI

Question 4

Which exchange rate has a greater impact on a country’s current account

Answer 4

The real exchange rate as it reflects iternational price competitiveness

Question 5

Purchasing Power Parity (PPP)

Question 6

real exchange rate

When RER=1

Answer 6

The purchasing power parity is equal. Same cost to buy in the same country

Question 7

When RER < 1

Answer 7

Domestic goods undervalued
More price competitive

Question 8

When RER > 1

Answer 8

Domestic goods overvalued
less price competitive

Question 9

How can a real exchange rate increase

Answer 9

• Appreciation or incr in inflation rate
• price of products incr in domestic country
• imports increase and exports decrease

Question 10

How can a real exchange rate decrease

Answer 10

depriciation or a decrease in inflation rate
- doemstic goods cheaper
- exports incraese and imports decrease