Question

The real exchange rate is the question content area bottom :

a. price of domestic goods in terms of foreign goods.
b. price of foreign goods in terms of domestic goods.
c. domestic currency price of foreign currency.
d. foreign currency price of domestic currency.
e. domestic currency price of domestic currency.

Answer 1

The real exchange rate is the price of domestic goods in terms of foreign goods. It is determined by the relative prices of goods between two countries.

Step-by-step explanation:

The real exchange rate is the price of domestic goods in terms of foreign goods. It is determined by the relative prices of goods between two countries. For example, if the price of a domestic good in the United States is $10 and the price of a similar foreign good in Japan is 1000 yen, then the real exchange rate would be 100 yen per dollar. This means that one dollar can buy 100 yen.

The real exchange rate is the price of domestic goods in terms of foreign goods. It reflects the number of foreign goods that one unit of domestic goods can purchase. This concept differs from the nominal exchange rate, which is the price of one currency in terms of another currency.

The operation of supply and demand in markets is central to determining both real and nominal exchange rates. Trade activities influence the demand for goods and, by extension, the currencies used to purchase those goods. For example, the U.S. demands for a pickup truck made in the U.S. will affect the value of the U.S. dollar when sold in international markets.

Monetary policy can also affect exchange rates. If a government prints more money or changes interest rates, it can impact the relative value of its currency, affecting exchange rates and trade dynamics. These exchange rates are significant factors when comparing economic statistics like GDP between countries with different currencies.