Chapter 13, Problem 1RQ

To determine

To know:Definition of nominal and real exchange rate and relation between them.

Explanation of Solution

Nominal exchange rate is the rate at which one currency is traded over another. It is a monetary term.

Real exchange rate is the quantity of goods and services which can be changed with another country’s goods and services. It is a real term.

Changes in the two-exchange rate are related as follows:

Nominal exchange rate is a monetary phenomenon. It shows value of one currency over another while real exchange rate is real phenomenon which shows quantity of goods and services which can be exchanged.

Real exchange rate = Nominal exchange rate − inflation.

  $\text{\%}\text{change}\text{in}{\text{e}}_{\text{nom}}\text{=}\text{\%}\text{change}\text{in}\text{e}\text{-}\text{π}$

  ${\text{e}}_{\text{nom}}$ = nominal exchange rate

  $\text{e}$ = real exchange rate

Any change in real exchange rate or inflation rate affects nominal exchange rate.

Economics Concept Introduction

Introduction:

Exchange rate is the rate at which one country’s currency is traded over another.