Understanding Foreign Currency Price: Nominal Exchange Rate

The question asks for the term that describes the price of one unit of foreign currency expressed in terms of the domestic currency.

Defining the Exchange Rate

The price at which one country's currency can be traded for another country's currency is known as the exchange rate.

Nominal Exchange Rate Explained

The nominal exchange rate is the rate at which one currency can be exchanged for another. It directly represents the price of one currency in terms of another, fitting the definition provided in the question.

For example, if the nominal exchange rate between the US Dollar (USD) and the Euro (EUR) is $1.10 \text{ EUR/USD}$, it means that one US Dollar can buy 1.10 Euros. Conversely, the price of one Euro in terms of US Dollars would be $1/1.10 \approx 0.91 \text{ USD/EUR}$.

Why Other Options Are Incorrect

• Fixed exchange rate: This is an exchange rate policy where a country formally sets and maintains an exchange rate with respect to another currency or a basket of currencies. It doesn't define the price itself but rather the policy governing it.
• Real exchange rate: This rate adjusts the nominal exchange rate for differences in price levels between countries. It measures the relative purchasing power of currencies and is calculated as:

  $ \text{Real Exchange Rate} = \text{Nominal Exchange Rate} \times \frac{\text{Domestic Price Level}}{\text{Foreign Price Level}} $

  This is different from the simple price of one currency for another.
• Pegged float rate: This is a type of exchange rate regime where a currency's value is fixed relative to another currency or a basket, but the central bank allows it to fluctuate within a certain band. This describes a policy, not the basic definition of price.

Therefore, the term that specifically describes the price of one unit of foreign currency in terms of domestic currency is the nominal exchange rate.