Test bank chapter 1 Introduction

Solution: Use Equation (8-1):
Percentage Change = (0.70 - 0.65)/0.65 = 7.69%

22. What is the percentage depreciation of the US dollar?

* A. -7.14%
B. -6.00%
C. -5.14%
D. -8.88%
E. -9.19*


Solution: Use Equation (8-2):
Percentage Change = (0.65 - 0.70)/0.70 = -7.14%

Use the following information to answer the next three questions.

Suppose that the Swiss franc appreciates from US$0.40 at the beginning of the year to US$0.44 at the end of the year. The US inflation rate is 5 percent and the Swiss inflation rate is 3 percent during the year.

23. What is the percentage appreciation of the Swiss franc?

A. 11.12%
B. 11.00%
* C. 10.00%
D. 10.59%
E. 12.00%


Solution: Use Equation (8-1):
Percentage Change = (0.44 - 0.40)/0.40 = 10%

24. What will the dollar price of the Swiss franc be in one year?

A. $0.4044
B. $0.5044
C. $0.6015
D. $0.7055
* E. $0.4078


Solution: Use Equation (8-3):
Predicted Rate = $0.4 x [(1 + 0.05)/(1 + 0.03)]
= $0.4078

25. What is the real depreciation (-) or real appreciation of the Swiss franc during the year?

A. 6.4%
B. 7.1%
* C. 7.9*
D. 8.6%
E. 9.9%


Solution: (0.4400 - 0.4078)/0.4078 = 7.9%

26. The spot rate is US$0.50 per Australian dollar. The annual interest rates are 12 percent for the United States and 8 percent for Australia. If these interest rates remain constant, then what is the US dollar market forecast of the spot rate for the Australian dollar in five years?

A. $4.669
B. $4.999
* C. $5.997
D. $6.447
E. $7.668


Solution: Use Equation (8-5):
Predicted Rate = $0.50 x [(1 + 0.12)⁵/(1 + 0.08)⁵]
= $0.5997

27. A 20 peso percent return in Mexico is higher than a 7 percent dollar return in the United States.

A. true
B. false
C. either true or false
D. none of the above
* E. it depends on whether these are nominal or real returns.