If the US Inflation Rate Is Expected to Be 3 Percent Next

question 19

Multiple Choice

If the U.S. inflation rate is expected to be 3 percent next year, the European inflation rate is expected to be 4% next year, and the spot rate between the euro and dollar is $1.30, then according to purchasing power parity, we would expect the dollar to _________ against the euro from $1.30 to __________.

• A) appreciate, $1.2875
• B) appreciate, $1.3126
• C) depreciate, $1.2875
• D) depreciate, $1.3126

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Definitions:

Owners' Equity

Represents the residual interest in the assets of a company after deducting liabilities, essentially the owner's claim against the company's assets.

Assets

Resources controlled by a business as a result of past events and from which future economic benefits are expected to flow to the entity.

Cumulative Effect

The total impact of a change in accounting principle or correction of an error reported in a single period's financial statements.

Change In Accounting Principle

An adjustment made to the accounting methods used by a company, often requiring retrospective application to prior period financial statements.