What is the price that balances supply and demand in the market for foreign-currency exchange in the open-economy macroeconomic model?
A) the nominal exchange rate
B) the nominal interest rate
C) the real exchange rate
D) the real interest rate

Question

Quizplus · Accepted Answer

The price that balances supply and demand in the market for foreign-currency exchange in the open-economy macroeconomic model is the real exchange rate. The real exchange rate adjusts to ensure that the quantity of currency supplied equals the quantity demanded, just like the price in any other market. The nominal exchange rate (A) is the price of one currency in terms of another currency, and it is affected by factors other than supply and demand, such as government policies and expectations. The nominal interest rate (B) is the rate at which one can borrow or lend in terms of a currency, and it affects the demand for that currency, but not the supply. The real interest rate (D) affects the capital flows and investment decisions, but it does not directly affect the exchange rate.

What Is the Price That Balances Supply and Demand in the Market