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.
Correct Answer: All of the above.
Solution : The correct answer is (d) All of the above.
The real exchange rate plays a crucial role in international trade, as it determines the relative prices of goods and services between countries. It affects the competitiveness of domestic goods in the international market, which can impact a country's export and import levels.
Additionally, the real exchange rate is relevant to domestic monetary policy. Changes in the real exchange rate can influence a country's inflation rate, interest rates, and overall macroeconomic conditions. Central banks often consider the real exchange rate when formulating monetary policy to manage inflation and promote economic stability.
Furthermore, the real exchange rate can also impact foreign direct investment (FDI). A favorable real exchange rate can make a country's assets and investments more attractive to foreign investors, potentially increasing the inflow of FDI.
Question : Assertion: A country with a fixed exchange rate regime has limited control over its monetary policy.
Reason: In a fixed exchange rate system, the central bank must intervene to maintain the exchange rate at the specified level, which restricts its ability to independently set interest rates.
Option 1: True, as the central bank needs to prioritize exchange rate stability over domestic monetary policy objectives.
Option 2: True, only if the country has a large foreign exchange reserve.
Option 3: False, as fixed exchange rate regimes provide more flexibility in implementing monetary policy.
Option 4: False, as countries with fixed exchange rates have complete control over their monetary policy.
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 : 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.
Question : What is the term used to describe the exchange rate between two currencies that does not involve the U.S. dollar?
Option 1: Cross exchange rate
Option 2: Spot exchange rate
Option 3: Nominal exchange rate
Option 4: Real exchange rate
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
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