Year- to- year movements in real exchange rates between industrialised countries like the U.S. and Australia are caused mostly by:
A) changes in relative rates of inflation.
B) changes in nominal exchange rates.
C) changes in quotas or tariffs.
D) changes in relative growth rates of output.
E) changes in capital controls.

Question

Quizplus · Accepted Answer

Year-to-year movements in real exchange rates between industrialized countries are primarily driven by changes in nominal exchange rates. This is because nominal exchange rates can fluctuate frequently due to market perceptions, interest rate differentials, and speculative activities, which in turn affect the real exchange rate when comparing currencies of different countries.

Year- To- Year Movements in Real Exchange Rates Between Industrialised