Question

Which one of the following is the best universal definition of an exchange rate?

1) The rate at which one currency can be exchanged for another
2) The rate at which goods and services can be exchanged between countries
3) The rate at which interest is charged on loans
4) The rate at which stocks and bonds can be bought and sold

Answer 1

An exchange rate is the price of one currency expressed in terms of another, influenced by supply and demand, and crucial for comparing GDP across countries. Therefore, the correct option is A.

Step-by-step explanation:

The best universal definition of an exchange rate is The rate at which one currency can be exchanged for another. An exchange rate is not a fact of nature but a price—the price of one currency expressed in terms of units of another currency. This key framework for analyzing prices is governed by the operation of supply and demand in markets. When comparing GDP across different countries, exchange rates are essential for converting values into a common denominator, facilitating a meaningful comparison. There are two types of exchange rates used for such purposes: market exchange rates and purchasing power parity (PPP).