Under a Fixed Exchange Rate System, If the Inflation Rate

question 54

Multiple Choice

Under a fixed exchange rate system, if the inflation rate in the United States is 0 percent a year and the inflation rate in Australia is 5 percent a year, then the U.S. real exchange rate will

• A) remain constant.
• B) increase 5 percent a year.
• C) decrease 5 percent a year.
• D) may increase or decrease.

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Definitions:

ROI Computation

The calculation of Return on Investment, which measures the gain or loss generated on an investment relative to the amount of money invested.

Net Book Value

The value of an asset after accounting for depreciation or amortization found on a company's balance sheet.

Operating Expense

Expenses incurred from a company's operational activities, excluding cost of goods sold, such as selling, general, and administrative expenses.

Minimum Required Rate of Return

The lowest acceptable return on investment for a project or investment, often determined by the cost of capital or desired profit.