The real exchange rate is defined as
A)the market exchange rate adjusted for price differences.
B)the purchasing power parity exchange rate.
C)the exchange rate that causes interest parity to hold.
D)the exchange rate that exists in major currency centers.

Question

Quizplus · Accepted Answer

The real exchange rate takes into account the relative prices of goods and services in two different countries, adjusting the market exchange rate accordingly. This provides a better understanding of the actual purchasing power of a currency in relation to another currency. Choice B is incorrect because the purchasing power parity exchange rate assumes that the prices of goods and services are the same in both countries, which is often not the case. Choice C and D are incorrect because they do not take into account price differences and are not related to the actual purchasing power of a currency.

The Real Exchange Rate Is Defined as