Which One of the Following Is an Example of Long-Run

question 95

Multiple Choice

Which one of the following is an example of long-run exposure to exchange rate risk? Ignore all fees and transaction costs.

• A)A U.S.firm owns land in Mexico valued at three million pesos.That value has remained constant in Mexican pesos for the past year.However, the firm's financial statement reflects a 3 percent decrease in the value of that land for last year.
• B)A U.S.firm sells $250,000 worth of goods to Peru.However, when the payment for those goods arrives and the U.S.firm exchanges the foreign currency, it receives only $248,700.
• C)A U.S.firm purchases $120,000 worth of goods from Canada.However, by the time the goods arrive and the invoice is payable, the cost of those goods has increased to $120,400.
• D)A few years ago, a U.S.firm built a factory in Asia to take advantage of the lower labor costs.Today, the Asian labor costs have increased such that the Asian factory no longer provides a cost advantage over a U.S.factory.
• E)A U.S.traveler withdrew an extra $2,000 in cash from her savings account to take with her as emergency funds when she traveled to Mexico.Before leaving on her trip, she exchanged this money into Mexican pesos.She never used any of this money during her vacation, so exchanged all of it back into U.S.dollars on her return and received $1,960.

---

Definitions:

Price Index

A statistical measure that shows changes in the price level of a basket of consumer goods and services over a period of time.

Inflation Rate

The percentage rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.

Price Index

A statistical measure that shows changes in the average price level of a selected basket of goods and services over time.

Real Gross Domestic Product

The total value of all goods and services produced within a country in a specific period, adjusted for inflation, indicating the actual growth of an economy.