In order to assess the relationship between the real exchange rate and total exports for any nation, one must construct a real effective exchange rate that measures:
A) a composite of each trading partner's real exchange rate change weighted by the share of trade.
B) the exchange rate that would exist with no inflation and balanced trade.
C) the average of all nominal exchange rates since we assume no inflation.
D) nominal trade adjusted for inflation.

Question

Quizplus · Accepted Answer

The real effective exchange rate should be a composite of each trading partner's real exchange rate change weighted by the share of trade. This takes into account the different trade relationships that a country has and how the real exchange rate affects each of those relationships.

In Order to Assess the Relationship Between the Real Exchange