The answer to the question of whether or not a U.S. dollar will buy more in the U.S. or in a foreign country is determined by: A) the nominal exchange rate. B) the real exchange rate. C) whether the nominal exchange rate is or

Question

The answer to the question of whether or not a U.S. dollar will buy more in the U.S. or in a foreign country is determined by:
A) the nominal exchange rate.
B) the real exchange rate.
C) whether the nominal exchange rate is > or < than 1.
D) you cannot determine the answer until you travel to the foreign country and convert U.S. dollars to the foreign currency.

Quizplus · Accepted Answer

The real exchange rate takes into account the inflation rates of both countries, and therefore reflects the purchasing power of a currency in relation to another currency. A higher real exchange rate means that a U.S. dollar will buy more in the foreign country compared to the United States, while a lower real exchange rate means that a U.S. dollar will buy less in the foreign country compared to the United States. Therefore, the answer cannot be determined solely by the nominal exchange rate or by comparing the value of the currency to 1, and it is not necessary to travel to the foreign country to determine the answer.

The Answer to the Question of Whether or Not a U.S