Currently, you can exchange $1 for SF 1.14. Assume that the average inflation rate in the U.S. over the next two years will be 2.5 percent annually as compared to 3 percent in Switzerland. Based on this information and relative purchasing power parity, which one of the following assumptions can you make regarding the next two years? A. The Swiss franc will appreciate against all currencies. B. The Swiss franc will appreciate against the U.S. dollar. C. The U.S. dollar will appreciate against all currencies. D. The U.S. dollar will appreciate against the Swiss franc. E. Both the U.S. dollar and the Swiss franc will appreciate against all other currencies.

The correct option is: D. The U.S. dollar will appreciate against the Swiss franc. The currency of…

Answered: Currently, you can exchange $1 for SF…

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter8: Relationships Among Inflation, Interest Rates, And Exchange Rates

Section: Chapter Questions

Problem 38QA

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Currently, you can exchange $1 for SF 1.14. Assume that the average inflation rate in the U.S. over the next two years will be 2.5 percent annually as compared to 3 percent in Switzerland. Based on this information and relative purchasing power parity, which one of the following assumptions can you make regarding the next two years?

A.	The Swiss franc will appreciate against all currencies.

B.	The Swiss franc will appreciate against the U.S. dollar.

C.	The U.S. dollar will appreciate against all currencies.

D.	The U.S. dollar will appreciate against the Swiss franc.

E.	Both the U.S. dollar and the Swiss franc will appreciate against all other currencies.

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