What is the real exchange rate?
A) It is the ratio of the domestic cost of a foreign basket of products compared with the cost of the same domestic basket of products.
B) It is the exchange rate minus the rate of domestic inflation.
C) It is the exchange rate plus the rate of domestic inflation.
D) It is the original exchange rate that was in effect when the nations were on a gold standard.

Question

Quizplus · Accepted Answer

The real exchange rate is defined as the ratio of the domestic cost of a foreign basket of products compared with the cost of the same domestic basket of products. This takes into account the relative purchasing power of each country's currency, rather than just the nominal exchange rate. B, C, and D are not correct definitions of the real exchange rate.

What Is the Real Exchange Rate