If Purchasing-Power Parity Between France and the U

question 44

Multiple Choice

If purchasing-power parity between France and the U.S.holds,but then U.S.prices rise,

• A)the real exchange rate is above its purchasing-power parity value.An increase in the nominal exchange rate can move it back.
• B)the real exchange rate is above its purchasing-power parity value.A decrease in the nominal exchange rate can move it back.
• C)the real exchange rate is below its purchasing-power parity value.An increase in the nominal exchange rate can move it back.
• D)the real exchange rate is below its purchasing-power parity value.A decrease in the nominal exchange rate can move it back.

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Definitions:

Expected Inflation

The anticipated rate at which the general level of prices for goods and services will rise over a period.

Internal Rate

Often referred to as the internal rate of return (IRR), it is the discount rate that makes the net present value (NPV) of all cash flows from a particular project zero.

Net Present Value

A financial metric used to evaluate the profitability of an investment or project, calculated by subtracting the present value of cash outflows from the present value of cash inflows over a period of time.

Payback Period

The amount of time it takes for an investment to generate cash flows sufficient to recover its initial cost.