Chapter 18, Problem 1SBD

Imagine an American MNC. Why it might decide to borrow in a country such as Brazil, where interest rates are high, rather than a country like Germany, where interest rates are low? Discuss why this may be the best strategy for the firm, given your understanding of the relationship between inflation, interest rates, and exchange rate.

The pressures on the foreign exchange market are such that they cause the British pound to depreciate against the US dollar. If the British pound tries to maintain the exchange rate against the US dollar, which of the following pressures will stop the pressure to devalue the British pound? a. Britain has to sell pounds to buy dollarsb. Britain will have to increase its money supply to create a domestic product c. Britain must buy pounds and sell dollarsd. Britain should do nothing as a fixed interest rate does not change

To force the value of the British pound to depreciate against the dollar, the Federal Reserve should: A. sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market. B. sell dollars for pounds in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market. C. sell dollars for pounds in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market. D. sell pounds for dollars in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market.