Introduction

Effective exchange rates: Activities

1 If you require a measure of the average movement of the rand against the currencies of its main trading partners, then the appropriate measure is the real bilateral exchange between the rand and the US dollar.

Incorrect. The statement is false.

What is required is an effective exchange rate which is a weighted average rate derived by weighting the exchange rate between the rand and the main currencies, using the different countries’ shares in South Africa’s foreign trade as weights.

Correct. The statement is indeed false.

What is required is an effective exchange rate which is a weighted average rate derived by weighting the exchange rate between the rand and the main currencies, using the different countries’ shares in South Africa’s foreign trade as weights.

2 An effective exchange rate is also called a trade-weighted exchange rate.

Correct. The statement is indeed true.

It is also called a trade-weighted exchange rate as well as a multilateral exchange rate.

Incorrect. The statement is true.

It is also called a trade-weighted exchange rate as well as a multilateral exchange rate.

3 An effective exchange rate can be expressed in both nominal and real terms.

Correct.

The nominal effective exchange rate is obtained by using nominal exchange rates, whereas the real effective exchange rate is obtained by adjusting the nominal effective exchange rate by the effective foreign price ratio.

Incorrect. The statement is true.

The nominal effective exchange rate is obtained by using nominal exchange rates, whereas the real effective exchange rate is obtained by adjusting the nominal effective exchange rate by the effective foreign price ratio.

4 It is only producers’ prices that can be used to calculate the effective foreign price ratio.

Incorrect. The statement is false.

The effective foreign price ratio is the trade-weighted ratio between South African prices and prices in the economies of our main trading partners. Different sets of prices can be used for this purpose. The SARB uses producers’ prices.

Correct. The statement is indeed false.

The effective foreign price ratio is the trade-weighted ratio between South African prices and prices in the economies of our main trading partners. Different sets of prices can be used for this purpose. The SARB uses producers’ prices.

5 The same weights are assigned to the different currencies that are used to calculate the effective exchange rate.

Incorrect. The statement is false.

Different weights are allocated based on the different countries’ shares in South Africa’s foreign trade.

Correct. The statement is indeed false.

Different weights are allocated based on the different countries’ shares in South Africa’s foreign trade.

Questions 6 to 11 are based on the table Exchange rates, commodity prices and financing rates in the SARB Quarterly Bulletin, June 2020.

6 What is the base year for the nominal and real effective exchange rate?

Correct.

The base year is 2010 and in the base year the index is equal to 100.

Incorrect.

The base year is 2010 and in the base year the index is equal to 100.

7 The index value for the nominal and real exchange rate cannot be higher than 100.

Incorrect. The statement is false.

It can be higher than 100, which indicates an overvaluation.

Correct. The statement is indeed true.

It can be higher than 100, which indicates an overvaluation.

8 What is the average index value of the nominal effective exchange rate for 2019?

(two decimal points)

Correct. It is 58,76.

[Table]

Incorrect. It is 58,76.

[Table]

9 What is the average index value of the real effective exchange rate for 2019?

(two decimal points)

Correct. It is 85,49.

[Table]

Incorrect. It is 85,49.

[Table]

10 If you compare the average index value of the nominal effective exchange rate for 2019 with 2018, you can conclude that the rand _______ in nominal terms against the basket of currencies.

Incorrect.

It decreased from 61,99 to 58,76, which indicates a depreciation.

Correct.

It decreased from 61,99 to 58,76, which indicates a depreciation.

11 If you compare the average index value of the real effective exchange rate for 2018 with 2017, you can conclude that the rand _______ in real terms against the basket of currencies.

Correct.

It increased from 85,27 to 87,17, which indicates an appreciation.

Incorrect.

It increased from 85,27 to 87,17, which indicates an appreciation.