Assume That the U

question 7

Multiple Choice

Assume that the U.S. interest rate is 5%, the European interest rate is 2%, and the future expected exchange rate in one year is $1.224. At approximately what exchange rate will the returns between the United States and Europe be equalized?

• A) $1.20
• B) $1.224
• C) $1.188
• D) $1.98

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Definitions:

GDP Deflator

A benchmark for evaluating the price levels of all new, home-produced, end-use goods and services within an economic system.

Price Index

A measure that examines the weighted average of prices of a basket of consumer goods and services over time.

Inflation Rate

The percentage rate at which the general level of prices for goods and services is rising annually.

CPI

Tracking the average evolution in pricing for a collection of goods and services purchased by people in urban areas, the Consumer Price Index serves as an indicator of these changes over time.