What is nominal and real exchange rate? Also explain the concept of real effective exchange rate. Discuss the economic factors impacting exchange rates.

Nominal and Real Exchange Rate:

The nominal exchange rate refers to the rate at which one currency can be exchanged for another. It is the price of one currency in terms of another currency. For instance, if the nominal exchange rate between the US dollar (USD) and the euro (EUR) is 1.20, it means that one USD can be exchanged for 1.20 EUR.

On the other hand, the real exchange rate takes into account the effects of inflation on the relative price of goods and services between two countries. It is adjusted for the differences in price levels between the two countries. The real exchange rate ____ _________ _________ _________ __________ ________ ______ ______ _________ ____.
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