Question

Scenario: Color-Me-Green Inc. Color-Me-Green Inc., a U.S.-based clothing merchant, has started doing business internationally. Having subsidiaries in several countries, the company must integrate financial information from all its subsidiaries with the U.S. home office at the end of the year. Suppose Country A has a currency called the Pulse (P). At the beginning of the year, the exchange rate between the Pulse and the U.S. dollar was P150/$. The inflation rate in Country A is running at an annual rate of 250 percent, whereas inflation in the U.S. is running at 2 percent.

Required:
What would most likely be the new exchange rate that Color-Me-Green can expect at the end of the year?

Answer 1

Answer:

P514.70/$

Explanation:

At the beginning the exchange rate was P150/$

The inflation is 250% in Country A and 2% in country B.

The net inflation for the two countries exchange rate will be 125%.

The new exchange rate for the Color-Me-Green will be ;

P150/$ * 125% * fisher effect inflation rate = P514.70