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The rate of nominal depreciation is faster, the higher is the home coun- try's inflation rate relative to that of the foreign country and the faster is its rate of real depreciation. 6. 7. Higher government debt in a small open economy is associated with lower net foreign assets. 9. Based on purchasing power parity the Canadian dollar is currently un- dervalued.

The rate of nominal depreciation is faster, the higher is the home coun- try's inflation rate relative to that of the foreign country and the faster is its rate of real depreciation. 6. 7. Higher government debt in a small open economy is associated with lower net foreign assets. 9. Based on purchasing power parity the Canadian dollar is currently un- dervalued.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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The rate of nominal depreciation is faster, the higher is the home coun- try's inflation rate relative to that of the foreign country and the faster is its rate of real depreciation. 6. 7. Higher government debt in a small open economy is associated with lower net foreign assets. 9. Based on purchasing power parity the Canadian dollar is currently un- dervalued. The forward exchange rate may contain a risk premium, and so it deviates from the market's expectation of the future nominal exchange 10. rate. A booming economy induces trade balance deficits, which increase the likehood of devaluation (or depreciation). 11. 12. A currency could be overvalued if consumer prices are generally higher at home than abroad when compared in a common currency, or under- valued if these prices are lower at home.
Transcribed Image Text:The rate of nominal depreciation is faster, the higher is the home coun- try's inflation rate relative to that of the foreign country and the faster is its rate of real depreciation. 6. 7. Higher government debt in a small open economy is associated with lower net foreign assets. 9. Based on purchasing power parity the Canadian dollar is currently un- dervalued. The forward exchange rate may contain a risk premium, and so it deviates from the market's expectation of the future nominal exchange 10. rate. A booming economy induces trade balance deficits, which increase the likehood of devaluation (or depreciation). 11. 12. A currency could be overvalued if consumer prices are generally higher at home than abroad when compared in a common currency, or under- valued if these prices are lower at home.
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