If Over the Next Few Years Inflation Is Higher in Mexico

question 12

Multiple Choice

If over the next few years inflation is higher in Mexico than in the U.S. ,then according to purchasing-power parity which of the following should rise?

• A)the U.S.real exchange rate but not the U.S.nominal exchange rate
• B)the U.S.nominal exchange rate but not the U.S.real exchange rate
• C)the U.S.real exchange rate but not the U.S.nominal exchange rate.
• D)neither the U.S.real nor the U.S.nominal exchange rate.

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Definitions:

Net Present Value Method

A method used in capital budgeting to assess the profitability of an investment by calculating the present value of its expected cash flows minus the initial investment cost.

Average Rate of Return

A financial metric used to calculate the profitability of an investment, expressed as a percentage of the initial cost of the investment.

Total Income

The sum of all revenue and gains a company acquires before any expenses are subtracted.

Residual Value

Residual value is the estimated amount that an asset will be worth at the end of its useful life.