Question:
If a country’s effective real exchange rate depreciates, this suggests that
(1) the country’s exports have become cheaper relative to foreign goods.
(2) the inflation rate in the country has significantly increased.
(3) the country’s nominal exchange rate has increased holding inflation constant.
(4) the country’s currency has appreciated against a basket of other currencies.
(5) a rise in domestic prices while nominal exchange rates remain constant.
Correct Answer:
(1)
Answer Explanation:
The Real Effective Exchange Rate (REER) measures a currency’s value against a weighted average of foreign currencies, adjusted for inflation. A depreciation of the REER means the country has experienced a gain in international trade competitiveness, as its exports are now relatively cheaper for foreign buyers.
Topic: Exchange Rates Year: 2024
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