Suppose That the Annual Interest Rate Is 5

question 9

Multiple Choice

Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the forward exchange rate, with one-year maturity, is $1.16/€. Assume that an arbitrager can borrow up to $1,000,000 or €892,857 (which is the equivalent of $1,000,000 at the spot exchange rate of $1.12/€) .
-If the annual inflation rate is 5.5 percent in the United States and 4 percent in the U.K.,and the dollar depreciated against the pound by 3 percent,then the real exchange rate,assuming that PPP initially held,is:

• A) 0.07.
• B) 0.98.
• C) 1.05.
• D) 1.20.

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Definitions:

Principle of Utility

A fundamental concept in utilitarian ethics that suggests actions should be judged as right or wrong based on their outcomes, specifically their ability to produce the greatest happiness for the greatest number of people.

Greatest Happiness

A principle that suggests the best action is the one that maximizes happiness or pleasure for the greatest number of people.

Associated Pleasure

The enjoyment or satisfaction derived from a particular activity, object, or association.

Work Ethic

The belief in the moral benefit and importance of work and its inherent ability to strengthen character.