Suppose the Swiss franc revalues from $0.40 at the beginning of the year to $0.44 at the end of the year.U.S.inflation is 5% and Swiss inflation is 3% during the year.What is the real devaluation ? or real revaluation + of the Swiss franc during the year?
A)+ 7.9%
B)- 5.3%
C)+ 8.1%
D)- 1.6%

Question

Quizplus · Accepted Answer

The real revaluation of the Swiss franc can be calculated by adjusting the nominal revaluation for the inflation differential between the two countries. The nominal revaluation is from $0.40 to $0.44, which is a 10% increase $\left(\frac{0.44 - 0.40}{0.40} = 0.10 \text{ or } 10\%\right)$. The real revaluation adjusts this for the inflation differential: U.S. inflation is 5% and Swiss inflation is 3%, so the differential is 2% in favor of the Swiss franc. The formula for real exchange rate change is approximately the nominal change minus the inflation differential (when the foreign inflation is subtracted from the domestic inflation, but since we're looking from the U.S. perspective, it's U.S. inflation minus Swiss inflation). Thus, the real revaluation is approximately 10% - 2% = 8%. The closest answer to this calculation is +7.9%.

Suppose the Swiss Franc Revalues from $0