real exchange rate

(noun)

The purchasing power of a currency relative to another at current exchange rates and prices.

Related Terms

Examples of real exchange rate in the following topics:

  • Real Versus Nominal Rates

    • Real exchange rates are nominal rates adjusted for differences in price levels.
    • The real exchange rate is the purchasing power of a currency relative to another at current exchange rates and prices.
    • The real exchange rate is the nominal rate adjusted for differences in price levels.
    • In this case, the real A/B exchange rate is 3.
    • PPP is then used to help determine real exchange rates.

  • Relationship Between Expectations and Inflation

    • The real interest rate would only be 2% (the nominal 5% minus 3% to adjust for inflation).
    • The difference between real and nominal extends beyond interest rates.
    • The distinction also applies to wages, income, and exchange rates, among other values.
    • Although the workers' real purchasing power declines, employers are now able to hire labor for a cheaper real cost.
    • Consequently, employers hire more workers to produce more output, lowering the unemployment rate and increasing real GDP.

  • Introducing Exchange Rates

    • In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another.
    • In finance, an exchange rate (also known as a foreign-exchange rate, forex rate, or rate) between two currencies is the rate at which one currency will be exchanged for another.
    • The spot exchange rate refers to the current exchange rate.
    • The forward exchange rate refers to an exchange rate that is quoted and traded today, but for delivery and payment on a specific future date.
    • Explain the concept of a foreign exchange market and an exchange rate

  • The Slope of the Aggregate Demand Curve

    • Due to Pigou's Wealth Effect, the Keynes' Interest Rate Effect, and the Mundell-Fleming Exchange Rate Effect, the AD curve slopes downward.
    • As a result of Keynes' interest rate effect, Pigou's wealth effect, and the Mundell-Fleming exchange rate effect, the AD curve is downward sloping.
    • Perhaps the most complex of the three inputs underlined in deriving aggregate demand is the Mundell-Fleming Exchange Rate Effect.
    • This new factor is the exchange rates, as the name implies.
    • Robert Mundell and Marcus Fleming noted that incorporating the nominal exchange rate into the mix makes it impossible to maintain free capital movement, a fixed exchange rate and independent monetary policy.

  • Impacts of Policies and Events on Equilibrium

    • When prices rise, a nominal amount of money becomes a smaller real amount of money, which means that the real value of money in the economy falls and the interest rate (i.e. the price of money) rises.
    • Finally, the exchange rate effectrelates changes in the exchange rate to changes in aggregate demand.
    • An increase in the exchange rate has the effect of increasing imports and decreasing exports, since domestic goods are relatively more expensive.
    • Since the world demands more goods produced in the home country, the demand for the domestic currency increases and the exchange rate rises.
    • This leads to an increase in the supply of the local currency and is usually accompanied by a sharp drop in the exchange rate of the affected country.

  • Fixed Exchange Rates

    • A fixed exchange rate is a type of exchange rate regime where a currency's value is fixed to a measure of value, such as gold or another currency.
    • A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime where a currency's value is fixed against the value of another single currency, to a basket of other currencies, or to another measure of value, such as gold.
    • A fixed exchange rate regime should be viewed as a tool in capital control.
    • China is well-known for its fixed exchange rate.
    • Explain the mechanisms by which a country maintains a fixed exchange rate

  • Exchange Rate Systems

    • The three major types of exchange rate systems are the float, the fixed rate, and the pegged float.
    • An exchange rate regime is how a nation manages its currency in the foreign exchange market.
    • A floating exchange rate, or fluctuating exchange rate, is a type of exchange rate regime wherein a currency's value is allowed to fluctuate according to the foreign exchange market.
    • Many economists believe floating exchange rates are the best possible exchange rate regime because these regimes automatically adjust to economic circumstances.
    • Crawling pegs:A crawling peg is an exchange rate regime, usually seen as a part of fixed exchange rate regimes, that allows gradual depreciation or appreciation in an exchange rate.

  • The Demand for Money

    • Specific to the liquidity function, L(R,Y), R is the nominal interest rate and Y is the real output.
    • However, when the demand for money is not stable, real and nominal interest rates will change and there will be economic fluctuations.
    • The interest rate is the rate at which interest is paid by a borrower (debtor) for the use of money that they borrow from a lender (creditor).
    • Interest-rate targets are a tool of monetary policy.
    • Data regarding money supply is recorded and published because it affects the price level, inflation, the exchange rate, and the business cycle.

  • Classical Theory

    • It analyzed and explained the price of goods and services in addition to the exchange value.
    • Equality of savings and investment: classical theory assumes that flexible interest rates will always maintain equilibrium.
    • Calculating real GDP: classical theorists determined that the real GDP can be calculated without knowing the money supply or inflation rate.
    • Real and Nominal Variables: classical economists stated that real and nominal variables can be analyzed separately.

  • Managed Float

    • Managed float regimes are where exchange rates fluctuate, but central banks attempt to influence the exchange rates by buying and selling currencies.
    • Managed float regimes, otherwise known as dirty floats, are where exchange rates fluctuate from day to day and central banks attempt to influence their countries' exchange rates by buying and selling currencies.
    • Some economists believe that in most circumstances floating exchange rates are preferable to fixed exchange rates.
    • However, pure floating exchange rates pose some threats.
    • A floating exchange rate is not as stable as a fixed exchange rate.