Question

7. Inflation, interest rates, and exchange rates Aa Aa E Relative inflation rates affect interest rates, exchange rates, the overall economic health of a country, and the operations and profitability of multinational companies. Consider the following statement: If a company borrows from a country with low interest rates, and the currency of the lending country appreciates, it becomes more expensive for the borrowing company to repay the initial loan. Based on your understanding of the relationship between relative inflation rates and exchange rates, identify whether the preceding statement is valid or invalid. The statement is valid, because as the currency of the lending country appreciates, it becomes more expensive for the borrowing company to repay the initial loan. The statement is invalid, because as the currency of the lending country appreciates, it becomes cheaper to repay the initial loan and thus increase savings. If companies borrow from countries with low interest rates, the potential gains from the interest savings will likely be by the losses from currency appreciation. over time against The currency of a country with a higher inflation rate than the U.S. inflation rate will the dollar.

Answer 1

The statement is valid, because as the currency of lending country appreciates, it becomes more expensive to repay

As higher domestic currency will now be required to repay loan

Offset by losses

Depreciate over time against dollar