Question

1. Distinguish precisely between the real exchange rate and the nominal exchange rate.
                                                                                                                                       [8 marks]

Answer 1

Answer) Real Exchange Rate:-

Real exchange rate is a rate which estimates how many times a commodity of goods purchased locally can be purchased abroad.  

So, it implies the ratio of items purchased in the domestic market to the commodities purchased in the foreign market.

It determines the ratio of price in the local market to the price in the foreign market.

So it computes the purchasing power of domestic currency to the foreign currency at a general time.

It gets affected highly by the change in the exchange rate in the global market.

Nominal Exchange Rate:-

The nominal exchange rate means a rate by which you can exchange your domestic currency with the foreign currency at any financial institutions like banks, NBFCs etc.

It is the value of money which is received in an exchange with another currency.

So in short, the nominal exchange rate is the rate which is presented by the financial organizations.

If the nominal exchange rate is high it will support an economy a lot in the trading activities. If it is high, the goods and services get more foreign components

If there is a difference in the Exchange rate, Nominal Exchange rate is less affected as related to the real exchange rate.