An Increase in the Domestic One- Year Interest Rate Expected

question 18

Multiple Choice

An increase in the domestic one- year interest rate expected to occur in, say, two years will, all else fixed, have which of the following effects in a flexible exchange rate regime?

• A) The nominal exchange rate will increase and the real exchange rate will decrease.
• B) The real exchange rate will increase with no change in the nominal exchange rate.
• C) The nominal exchange rate will increase with no change in the real exchange rate.
• D) No change in either the nominal or real exchange rate.
• E) Both the real and the nominal exchange rate will increase.

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Definitions:

Straight Salary Plan

A compensation plan that permits salespeople to be paid for performing various duties that are not reflected immediately in their sales volume.

Sales Volume

The total quantity of products or services sold by a company within a specific period, often used as a measure of business activity.

CEO Compensation

The payment and benefits package provided to a company's chief executive officer, including salary, bonuses, stock options, and other perks.

Stock Options

A benefit in the form of an option given by the company to an employee to buy stock in the company at a discount or at a stated fixed price.