Question : The real exchange rate is a measure of:
Option 1: Purchasing power of one currency relative to another.
Option 2: Exchange rate fluctuations in the short term.
Option 3: The value of a currency in terms of gold.
Option 4: Speculative movements in the foreign exchange market.
Correct Answer: Purchasing power of one currency relative to another.
Solution : The correct answer is (a) Purchasing power of one currency relative to another.
The real exchange rate is a measure of the purchasing power of one currency in relation to another currency. It takes into account the nominal exchange rate and adjusts it for differences in inflation rates between the two countries. The real exchange rate reflects the actual purchasing power of a currency in terms of goods and services.
A higher real exchange rate indicates that a currency has greater purchasing power, meaning it can buy more goods and services compared to another currency. Conversely, a lower real exchange rate implies reduced purchasing power.
The real exchange rate is an important indicator for assessing the competitiveness of a country's goods and services in the international market. It affects international trade flows and can impact a country's exports and imports.
Question : Which exchange rate is used to compare the purchasing power of different countries?
Option 1: Nominal exchange rate.
Option 2: Real exchange rate.
Option 3: Spot exchange rate.
Option 4: Forward 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
Option 4: Spot exchange rate
Question : Which of the following is a potential disadvantage of a fixed exchange rate system?
Option 1: Higher inflation rates
Option 2: Currency fluctuations
Option 3: Uncertainty in trade balances
Option 4: Speculative attacks on the currency
Question : What is the term used to describe the rate at which one currency can be exchanged for another in the spot market?
Option 1: Forward exchange rate
Option 2: Cross exchange rate
Option 3: Nominal exchange rate
Option 4: Real exchange rate
Question : Which of the following is an example of a freely floating exchange rate system?
Option 1: Gold standard
Option 2: Currency board arrangement
Option 3: Managed float exchange rate
Option 4: Pegged exchange rate
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