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CMA Final · Strategic Financial Management · The International Financial Environment

Real exchange rate analysis: Spot USD/INR moves from 80 to 84 over a year. India's inflation is 7% and US inflation is 2%. Taking the base-year real rate as 80, the real exchange rate at year end (INR per USD, price-adjusted: 84 × 1.02/1.07) is closest to:

Adjusting the nominal rate of 84 by the US-to-India price ratio 1.02/1.07 gives about 80.07, nearly the base value of 80. The nominal rupee depreciation of 5% roughly equals the inflation differential, so there is almost no real depreciation.

  1. A80.07Correct
  2. B84.00
  3. C78.50
  4. D88.00

Explanation

Real rate = 84 × 1.02/1.07 = 85.68/1.07 = 80.07. So the real rate is almost unchanged from 80: the nominal depreciation of 5% merely offset the inflation differential of about 4.9%. Ignoring inflation gives 84.

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