The Difference Between the Nominal and Real Exchange Rates Is

question 110

Multiple Choice

The difference between the nominal and real exchange rates is that

• A) nominal rates are temporary, while real rates are permanent.
• B) the real exchange rate is the actual rate used by traders.
• C) the real exchange rate takes relative purchasing power into account, while the nominal rate does not.
• D) the nominal exchange rate is approximate, while the real rate is precise.

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Definitions:

Purchasing Power

The worth of a currency depicted by how much goods or services can be purchased with one unit of that currency.

Basket of Goods

A collection of products and services used as a constant sample for measuring changes in prices, often in the calculation of inflation.

CPI (Consumer Price Index)

An index that measures changes in the average price of consumer goods and services purchased by households over time.

Real Value

The value of an amount of money in terms of the goods and services it can buy, adjusted for inflation.