Question : A decrease in the real exchange rate implies:
Option 1: Increased competitiveness of domestic goods in the international market.
Option 2: Reduced competitiveness of domestic goods in the international market.
Option 3: Increased inflation in the domestic economy.
Option 4: Reduced inflation in the domestic economy.
Correct Answer: Increased competitiveness of domestic goods in the international market.
Solution : The correct answer is (a) Increased competitiveness of domestic goods in the international market.
A decrease in the real exchange rate means that the relative price of domestic goods and services has decreased compared to foreign goods and services. This makes domestic goods relatively cheaper for international consumers, increasing their competitiveness in the international market. As a result, the demand for domestic goods may increase, leading to higher exports and potentially boosting the domestic economy.
Conversely, an increase in the real exchange rate would imply reduced competitiveness of domestic goods in the international market, as they would become relatively more expensive compared to foreign goods.
Question : An increase in the nominal exchange rate can be caused by:
Option 1: Lower interest rates in the domestic economy.
Option 2: Higher inflation rates in the domestic economy.
Option 3: Lower inflation rates in the domestic economy.
Option 4: Government intervention in the foreign exchange market.
Question : Which of the following is a disadvantage of a high real exchange rate?
Option 1: Increased exports.
Option 2: Increased tourism.
Option 3: Decreased competitiveness in the international market.
Option 4: Reduced inflationary pressures.
Question : What is the term used to describe the difference between the nominal exchange rate and the inflation rate between two countries?
Option 1: Real exchange rate
Option 2: Cross exchange rate
Option 3: Forward exchange rate
Option 4: Spot exchange rate
Question : What is the term used to describe the rate at which a currency can be exchanged immediately in the spot market?
Option 1: Nominal exchange rate
Option 2: Real exchange rate
Option 3: Cross exchange rate
Question : The real exchange rate is important for:
Option 1: International trade.
Option 2: Domestic monetary policy.
Option 3: Foreign direct investment.
Option 4: All of the above.
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