Which of the Following Best Describes the Link Between Changes

question 41

Multiple Choice

Which of the following best describes the link between changes in a real interest rate and changes in an exchange rate? An increase in U.S. interest rates should produce

• A) an inflated difference between the U.S. rate of interest and the rate applied in the rest of the world, leading to a self-fulfilling prophecy that the dollar will eventually depreciate.
• B) a decline in worldwide rates, which in turn increases worldwide demand for the dollar; the exchange rate, the price of the dollar, therefore climbs.
• C) inflation in the rest of the world and a corresponding appreciation in the value of the dollar.
• D) any of the above, depending on the circumstance.
• E) none of the above.

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Definitions:

Operating Leverage

Operating Leverage is a measure of how revenue growth translates into growth in operating income, determined by the proportion of fixed versus variable costs a company has.

Variable Cost

Operational expenses of a business that alter in accordance with the level of activity.

Tax Rate

A tax rate is the percentage at which an individual or corporation is taxed on their income or profits.

Degree of Operating Leverage

A financial metric that measures the sensitivity of a company's operating income to its sales.