Referring to nominal and real exchange rates, if nominal rates change along with

Question

Referring to nominal and real exchange rates, if nominal rates change along with an equal price change in the country, the result for the foreign subsidiary in the country most often is there is (are) Select one O a, no changes in arbitrage opportunities for the firm's cash manager O b. no alteration to the firm's cash flow O c. changes in the firm's economic exposure O d. changes in purchasing power for the firm Next page page FINAL EXAM PART TWO DIRECTIONS XAM REVIEWS PART ONE AND Jump to ge-11 # 2019 fullerton.edu/mod/guizattempt.php?attempt=77592&cmide11; 2961&pa;

Explanation / Answer

correct answer is D,

expected changes in the spot exchange rate are entirely driven by expected differences in national inflation rates

%Sef/d=ef-ed

%Sef/d represents the expected percentage change in the spot exchange rate, while ed and ef represent the expected domestic and foreign inflation rates

the expected inflation differentials should equal both the expected change in the exchange rate and the nominal interest rate differential. This relationship implies that the expected change in the exchange rate equals the nominal interest rate differential, which is uncovered interest rate parity.

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