Macroeconomics
4th Edition
ISBN: 9780393602487
Author: Jones, Charles I.
Publisher: W. W. Norton & Company
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Question
Chapter 20, Problem 1RQ
To determine
Difference between the nominal exchange rate and real exchange rate.
Expert Solution & Answer
Explanation of Solution
The unit of currencies exchanged with or for a foreign currency is in terms of the nominal exchange rate. The real exchange rate is what an individual purchased using one unit of foreign currency. In this case, it shows the real value of currency that is not with respect to inflation. Also, the real exchange rate shows how many units of one country’s goods must be given up to purchase those same goods in another country. If the nominal exchange rate changes or adjusted to inflation, then it is known that as real exchange rate.
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