We use the effective exchange rate calculation to tell us:
A) the underlying rate of inflation.
B) how international finance affects a nation's exchange rate.
C) how the overall international purchasing power of a nation has changed.
D) the natural (real) exchange rate taking out the effects of inflation.

Question

Quizplus · Accepted Answer

The effective exchange rate calculation is used to determine how the overall international purchasing power of a nation has changed by taking into account the exchange rates of its major trading partners. It is a weighted average of currencies, reflecting the relative importance of each country's currency in international trade. This measure helps to identify whether a country's currency is stronger or weaker compared to other currencies over a period of time. It does not reflect underlying inflation rates or the impact of international finance on a nation's exchange rate.

We Use the Effective Exchange Rate Calculation to Tell Us