Suppose it is January 1,1994 and the Deutsche mark revalues from $.30 at the beginning of the year to $.33 at the end of the year.Inflation during the year is 5% in the U.S.and 3% in Germany.What is the real devaluation ? or real revaluation + of the Deutsche mark during the year?
A)+ 7.9%
B)- 5.3%
C)+ 8.1%
D)-1.6%

Question

Quizplus · Accepted Answer

To calculate the real devaluation or revaluation, we need to use the formula:

Real Exchange Rate = (Nominal Exchange Rate x (1 + Inflation of Foreign Currency)) / (1 + Inflation of Domestic Currency)

Using the given data, we get:

Real Exchange Rate = ($.33 x (1 + 0.03)) / (1 + 0.05) = $0.3138

To find the real devaluation or revaluation, we need to calculate the percentage change in the real exchange rate. We can use the following formula for that:

Percentage Change = ((New Value - Old Value) / Old Value) x 100%

Using the real exchange rate from the beginning of the year as the old value and the real exchange rate at the end of the year as the new value, we get:

Percentage Change = ((0.3138 - 0.30) / 0.30) x 100% = 7.9%

Therefore, the real revaluation of the Deutsche mark during the year was 7.9%. Answer choice A is correct.

Suppose It Is January 1,1994 and the Deutsche Mark Revalues