Scenario 35-2 ​

question 84

Multiple Choice

Scenario 35-2
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In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years.
-Refer to Scenario 35-2. Suppose that the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% but that it actually leaves inflation at 25%. Suppose that the public had expected that the Department of Finance would reduce inflation, but only to 20%. Then

• A)unemployment falls, but it would have fallen more if people had been expecting 12.5% inflation.
• B)unemployment falls, but it would have fallen more if people had been expecting 22% inflation.
• C)unemployment rises, but it would have risen more if people had been expecting 12.5% inflation.
• D)unemployment rises, but it would have risen more if people had been expecting 22% inflation.

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Definitions:

Temporal Method

An accounting technique used for converting the financial statements of a subsidiary into the parent company's reporting currency, by using exchange rates based on the timing of the underlying transactions.

Year-End Spot Rate

The exchange rate of one currency to another at the close of the last trading day of the financial year.

Historical Rate

The exchange rate used to convert foreign currency amounts involved in a transaction to the reporting currency based on the rate in effect at the time of the transaction.

Current-Rate Method

An accounting method used in translating the financial statements of a foreign subsidiary, where all current and non-current items are translated at the current exchange rate.