An Increase in the Domestic One-Year Interest Rate Expected to Occur

question 39

Multiple Choice

An increase in the domestic one-year interest rate expected to occur in,say,two years will,all else fixed,have which of the following effects in a flexible exchange rate regime?

• A)the real exchange rate will increase with no change in the nominal exchange rate.
• B)the nominal exchange rate will increase with no change in the real exchange rate.
• C)both the real and nominal exchange rate will increase.
• D)no change in either the nominal or real exchange rate.

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Definitions:

Retention Ratio

The retention ratio, in financial terms, refers to the percentage of a company's net income that is retained and not distributed as dividends to shareholders, indicating how much of its profit a company reinvests.

Dividend Payout Ratio

A financial ratio that measures the percentage of a company's net income that is distributed to shareholders in the form of dividends.

Capital Intensity Ratio

A measure of how much capital is required to produce one unit of output, often used to evaluate the business's capital efficiency.

Auto Manufacturing

The industry involved in the design, development, production, marketing, and sale of motor vehicles.