Chapter 42, Problem 2MCQ

To determine

The correct option for the nominal exchange rate at which a given basket of goods and services would cost the same in each country.

Answer to Problem 2MCQ

Option d is correct.

Explanation of Solution

Explanation for the correct option:

d

Purchasing power parity provides the best indication of the country’s economic condition. It uses currency conversion rates for indicating economic conditions by denominated national currency to the other currency. Therefore, option d is correct.

Explanation for incorrect options:

a.

The same value of the basket of goods and services will be shown by the conversion of currency.

b.

Appreciation in one currency will give different values to the currencies.

c.

Depreciation of one currency will depict the different values of the same basket of goods and services.

e.

Currency account refers to an account that depicts the trade of goods and services across countries. It is a part of the BOP.

Economics Concept Introduction

Foreign Exchange rate: The rate at which currencies of two different countries are exchanged. In other words, it is the rate at which one currency is exchanged with the other currency.