Suppose Certain Providers of Finance Are to Be Compensated for Their

question 43

Multiple Choice

Suppose certain providers of finance are to be compensated for their rate of time preference by a discount rate of 3 per cent, at a time when inflation is anticipated to be 4 per cent. What overall return will they require on risk- free investments?

• A) 1%
• B) 1.1%
• C) 12%
• D) 7.1%

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Definitions:

Absolute Purchasing Power Parity

A theory that suggests that the price of goods in different countries should be equal when measured in a common currency.

Exchange Rate

The price of one country's currency in terms of another currency or currencies.

Inflation

The pace at which prices for a wide range of goods and services elevate, depreciating the power to purchase.

Exchange Rate

The rate at which one currency can be exchanged for another.