Question

21) The number of Mexican pesos required to buy the same number of goods and services in Mexico as one U.S. dollar buys in the United States is a description of the ________ exchange rate.

A) actual

B) real

C) purchasing power parity

D) chain-weighted

Answer 1

Purchasing power parity can be defined as when people of one country are able to buy the same basket of goods and services at the same rate as the people of another country over time.

Nominal exchange rate can be defined as number of units of domestic currency which can purchase a unit of given foreign currency.

Real exchange rate predicts how many times more or less goods and services can be purchased abroad compared to the domestic market for a given amount when it is converted into a foreign currency.

Real exchange rate= nominal exchange rate * foreign price/domestic price.

Hence it can be said that when the number of Mexican pesos required to buy the same number of goods and services in Mexico as one U.S. dollar buys in the United States is a description of the real exchange rate.

Hence option B is the correct answer.