Question

1. Suppose it is January 1, 1994, and the Deutsche mark revalues from $0.31 at the beginning of the year to $0.35 at the end of the year. Inflation during the year is 5.2% in the U.S. and 3.5% in Germany. What is the real devaluation (‑) or real revaluation (+) of the Deutsche mark during the year?

a.

‑ 2.60%

b.

‑ 7.30%

c.

11.02%

d.

9.10%

Answer 1

%r(nominal) = %r(real) + (foreign inflation rate - domestic inflation rate)

So, %r(real) = 12.90% - (5.2% -3.5%) = 11.2% => Ans c)