The real exchange rate is defined as:
A) the nominal exchange rate plus the rate of inflation.
B) the spot exchange rate.
C) the cost of a basket of goods and services in one country compared to the cost of the same basket in another country.
D) the exchange rate that would exist if nominal rates were not fixed by governments.

Question

Quizplus · Accepted Answer

The real exchange rate compares the cost of a basket of goods and services in one country to the cost of the same basket in another country, adjusting for exchange rates and inflation. Option A is incorrect because it only considers inflation, ignoring exchange rate movements. Option B is incorrect because the spot exchange rate is the current exchange rate at a particular moment, but it may not reflect the long-term changes in the cost of goods and services. Option D is incorrect because it assumes that nominal rates are fixed by governments, which may not always be true.

The Real Exchange Rate Is Defined As