Assuming No Change in the Nominal Exchange Rate, How Will

question 31

Multiple Choice

Assuming no change in the nominal exchange rate, how will a higher rate of inflation in Canada relative to France affect the real exchange rate between the two countries? (Assume Canada is the "domestic" country.)

• A)The real exchange rate will rise.
• B)The real exchange rate will fall.
• C)The real exchange rate will be unaffected.
• D)The impact on the real exchange rate cannot be predicted.

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Definitions:

Call Option

An agreement in finance that grants the purchaser the option, without the mandate, to acquire a security, bond, commodity, or different asset at a pre-determined price during a defined timeframe.

Variance

The average squared deviation between the actual return and the average return.

American Call Option

A financial contract that gives the buyer the right, but not the obligation, to buy an underlying asset at a specified price on or before a specified date.