Question

If a nation’s currency doubles in value on foreign exchange markets, the currency is said to ________, reflecting a change in the ________ exchange rate. appreciate, nominal appreciate, real depreciate, nominal

Answer 1

Answer: appreciate, nominal

Explanation: when a country's currency doubles in value on the foreign exchange market, it affects its nominal exchange rate but not its real exchange rate. The nominal exchange rate between two countries is the relative price of their currencies and when it changes such that it can buy more of a foreign currency (doubling in value), it is said to have appreciated. Therefore, if a nation’s currency doubles in value on foreign exchange markets, the currency is said to appreciate, reflecting a change in the nominal exchange rate.

Answer 2

Answer: Appreciate, nominal

Explanation: If a nation's currency doubles in value, it is said to appreciate, thereby reflecting a change in the nominal exchange rate. An increase in a nation's currency signifies an appreciation of its currency. When the currency appreciates, it affects the exchange rate at which the currency can be traded.

Option b is not correct because when a currency appreciates, it does not necessarily affect the real exchange rate. Real exchange rate means the rate at which goods and services of a country can be traded for goods and services of another country.