Suppose the pound devalues from $1.25 at the start of the year to $1.00 at the
end of the year. Inflation during the year is 15% in England and 5% in the U.S.
What is the real devaluation (-) or real revaluation (+) of the pound during the
year?
a. - 12.38%
b. - 20.71%
c. + 2.39%
d. + 1.46%
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if you're asking how, price it against a commodity to make it easier to solve mentally is how i'd approach it. Price the commodity with the same exchange rate at the start of the year, and then apply the devaluations.
I'm not a finance expert, and I only trade on technicals, but I'm going with A. The inflation in the US is extraneous info and the 20% appreciation of USD is offset by the inlfation to make the true appreciation about 12%
I actually had this on a macro exam a while back; answer is A
Answer=`A
Pound devalues 20% Inflation, which raises its value, is about 10% (15-5) 20-10=10% roughly… didn't do any calculations. But that's the method I use.
Thanks guys. Yes, the answer is A :)
= ( 1/1.25 (convert $1 into pound) * 1.15 (deposit in UK) / 1 (fx rate in 1 yr) ) / 1.05 (value of $1 deposited in US in 1 yr) - 1
= (0.92/1.05) - 1
I'd say this was pretty obvious. It's definitely an overall devaluation and it can't be by more than 20% because of the inflation, leaving only one possible answer.
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