Author Question: Define the concept of the real exchange rate and explain how it differs from the nominal exchange ... (Read 26 times)

HCHenry · **on:** Jun 30, 2018

Define the concept of the real exchange rate and explain how it differs from the nominal exchange rate.

What will be an ideal response?

Question 2

Describe the effect of the 2008-2009 global financial crisis on the Swiss franc and the central bank's efforts to respond to the resulting problems.

What will be an ideal response?

leahchrapun · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

In general, the real exchange rate between two countries' currencies is the price of the second country's commodity basket (in terms of the first country's currency) relative to the price of the first country's commodity basket. For example, in the case of U.S. and Europe, the real dollar/euro exchange rate is the dollar value of Europe's price level divided by the U.S. price level. We can thus denote the real dollar/euro exchange rate ( ) as:
= ( PE)/PUS
where is the nominal dollar/euro exchange rate, PE is Europe's price level, and PUS is the U.S. price level. Unlike the real exchange rate, which is the relative price of two output baskets, the nominal exchange rate is the relative price of two currencies. However, as we can see from the equation above, real exchange rates are defined in terms of nominal exchange rates.

Answer to Question 2

The 2008-2009 global financial crisis resulted in appreciation of the franc as currency traders purchased the franc as a safe haven currency. The Swiss economy consequently suffered as its products became less competitive with imports. The Swiss responded by committing to currency intervention designed to control appreciation of the franc and restore the country's competitiveness in global markets.