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Exchange rate

1) Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other countries than it would under a freely floating exchange rate system.
true.
false.

2) Rockford Co. is a U.S. manufacturing firm that produces goods in the U.S. and sells all products to retail stores in the U.K.; the goods are denominated in pounds. It finances a small portion of its business with pound-denominated loans from British banks. Which of the following is true? (Assume that the amount of products to be sold is guaranteed by contracts.)

a) The dollar value of sales is higher if the pound depreciates against the dollar.
b) The dollar value of sales is unaffected by the pound's exchange rate.
c) A and B.
d) None of the above.

Solution Preview

1) Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other countries than it would under a freely floating exchange rate system.
true.
false.

Answer: true.

Under a freely floating exchange system, US inflation would cause dollar to depreciate.Thus the increase in prices of US manufactured goods due to inflation would be offset by a depreciated dollar. The price in dollar terms has ...

Solution Summary

Answers to 2 multiple choice questions on exchange rates.

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