The following statements relate to exchange rates. Label each statement as eithe

Question

The following statements relate to exchange rates. Label each statement as either True or False False The value of one currency in terms of another currency is called a currency rate. True A real exchange rate takes into account differences in countries' price levels. A fried chicken dinner in Tennessee costs $10. Suppose Jared can convert $10 into 7.5 euros. He can purchase the same chicken dinner in Portugal for 7.5 euros. This relationship is called purchasing power parity After her plane touches down in Moscow, Maggie notices that $1 is worth 25 rubles (Russia's currency). A week later, Maggie returns to the airport to go home and notices that $1 is worth 28 rubles. The ruble has appreciated in value against the dollar. The yen is Japan's currency. In the dollarlyen foreign exchange market, if more yen are being demanded than are being offered, the yen will depreciate in value relative to the dollar

Explanation / Answer

1.

The value of one currency in terms of another currency is called the nominal exchange rate.

Hence the given statement is false.

2.

Real exchange rate = Nominal exchange rate * domestic price/ foreign price

It means real exchange rate takes into account the price level.

Hence the given statement is true.

3.

Purchasing power parity can be defined as an economic theory that tells that the exchange rate between two currencies will be equal to the ratio of the currencies purchasing power.

Since the price of the fried chicken dinner is same both in the Tennesse and Portugal when the price is converted in the same currency.

Hence the this is the true statement.

4.

Initial exchange rate;

$1=25 rubles

later exchange rate;

$1=28 rubles.

Since now the $1 can purchase more rubles. It means the dollar has appreciated while rubles has been depreciated.

Hence the given statement is false.

5.

Since more yen is demand than earlier for the same $1. It means for purchasing $1 now more yen is required, therefore Yen has been appreciated relative to the dollar.

Hence the given statement is true.

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