Question : Which of the following is a measure used to assess the value of a country's currency relative to a basket of other currencies?
Option 1: Consumer Price Index (CPI)
Option 2: Gross Domestic Product (GDP)
Option 3: Real Effective Exchange Rate (REER)
Option 4: Producer Price Index (PPI)
Correct Answer: Real Effective Exchange Rate (REER)
Solution : The correct answer is c) Real Effective Exchange Rate (REER)
The Real Effective Exchange Rate (REER) is a measure used to assess the value of a country's currency relative to a basket of other currencies. It takes into account the nominal exchange rate as well as the relative price levels between countries. The REER is calculated by adjusting the nominal exchange rate by a country's inflation rate compared to its trading partners' inflation rates. It provides a more comprehensive and accurate measure of a country's currency value, as it considers not only the exchange rate against a single currency but also the competitiveness of the country's goods and services in international markets. The REER is commonly used by policymakers, economists, and analysts to monitor and analyze a country's international competitiveness and its impact on trade flows.
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