Concerning the Exchange Rate Index of the U

question 142

Multiple Choice

Concerning the exchange rate index of the U.S.dollar, suppose that the dollar's real exchange rate index falls from 125 to 110.This means that

• A) U.S. goods are less competitive on foreign markets.
• B) U.S. goods are more competitive on foreign markets.
• C) the dollar has appreciated against the currencies of its major trading partners.
• D) U.S. price levels are identical to its trading partners.

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Definitions:

Price Level

A measure of the average prices of goods and services in an economy at a specific point in time.

Quantity Equation

The equation M × V = P × Y, which relates the quantity of money, the velocity of money, and the dollar value of the economy’s output of goods and services.

Real Interest Rate

The rate of interest an investor expects to receive after allowing for inflation, reflecting the true cost of borrowing and the true return on lending.

Nominal Interest Rate

The interest rate before taking inflation into account, representing the face value of interest payments on loans or investments.