In foreign exchange markets, the __________ exchange rate is defined as the price of one unit of foreign currency in terms of the domestic currency.

Introduction / Context:
Exchange rates are central to international economics and finance. They measure how much of one currency is needed to obtain a unit of another currency. There are different ways to describe exchange rates, including nominal and real exchange rates, and fixed or flexible regimes. This question asks you to identify the term used for the basic quoted price of one unit of foreign currency in terms of domestic currency.

Given Data / Assumptions:

• We are looking at the price of one unit of foreign currency expressed in domestic currency units.
• This is the rate you usually see quoted by banks or in financial news.
• The options mention nominal, fixed and real exchange rates, as well as an artificial rate.
• The regime (fixed or flexible) is separate from the basic concept of nominal versus real.

Concept / Approach:
The nominal exchange rate is the rate at which one currency can be exchanged for another in the foreign exchange market. It is usually quoted as, for example, 1 US dollar equals a certain number of rupees. This rate does not adjust for differences in price levels between the two countries. The real exchange rate, by contrast, adjusts the nominal rate for relative price levels to reflect the purchasing power of currencies. The term “fixed exchange rate” refers to a regime where the nominal rate is pegged by policy, not the definition of the rate itself. Therefore, the basic price of one foreign currency unit in domestic currency is called the nominal exchange rate.

Step-by-Step Solution:
Step 1: Identify that the question describes the commonly quoted price of foreign currency in terms of domestic currency. Step 2: Recall that this basic quoted rate in the market is known as the nominal exchange rate. Step 3: Understand that fixing or floating refers to how the nominal rate is determined, not to the definition of the rate itself. Step 4: Distinguish the nominal rate from the real exchange rate, which adjusts for price level differences. Step 5: Select “Nominal exchange rate” as the correct term.

Verification / Alternative check:
Think of a simple example: if the news says “1 dollar equals 80 rupees”, that 80 rupees per dollar is the nominal exchange rate. To compute the real exchange rate, you would have to adjust this for price level indices in both countries, which the question does not mention. Also, a fixed exchange rate regime might fix the nominal rate at a particular level, but the concept of nominal rate exists regardless of whether it is fixed or floating. This confirms that the question is referring to the nominal exchange rate.

Why Other Options Are Wrong:
Artificial exchange rate: This is not a standard technical term used in basic macroeconomics texts to describe the usual quoted rate.
Fixed exchange rate: This describes a regime where the nominal rate is pegged by the authorities, but it is not the generic term for the price of foreign currency in domestic terms.
Real exchange rate: This adjusts the nominal exchange rate for relative price levels between countries to measure relative purchasing power, not simply the direct price of foreign currency in domestic currency units.

Common Pitfalls:
Students sometimes confuse real and nominal exchange rates because both involve currency values. The key distinction is that the nominal rate is the directly quoted market rate, whereas the real rate incorporates price levels to examine competitiveness. Another pitfall is to think that a fixed exchange rate is a completely different type of rate; in reality, it is still a nominal exchange rate, only maintained at a fixed level by policy. Remembering these distinctions helps in choosing the correct term in such questions.

Final Answer:
The price of one unit of foreign currency in terms of domestic currency is called the nominal exchange rate.