Question

Which of the following is not an example of how an MNC can be affected by exchange rate movements?

a. Remitted earnings from the foreign subsidiary of a U.S.-based MNC may increase due to a stronger home currency.
b. When the home currency weakens, products denominated in that currency become cheaper to foreign customers, which may increase foreign demand for the MNC's products.
c. When the home currency strengthens, products denominated in that currency become more expensive to foreign customers, which may reduce foreign demand for the MNC's products.
d. Remitted earnings from the foreign subsidiary of a U.S.-based MNC may increase due to a weaker home currency.
e. Due to exchange rate fluctuations, the number of units of a firm's home currency needed to purchase foreign supplies can change even if suppliers have not adjusted their prices.

Answer 1

Option (a) is incorrect because typically, a stronger home currency results in a decreased value of remitted earnings from a foreign subsidiary when converted back to U.S. dollars, not an increase.

Step-by-step explanation:

Among the options provided regarding how an MNC (multinational corporation) can be affected by exchange rate movements, option (a) 'Remitted earnings from the foreign subsidiary of a U.S.-based MNC may increase due to a stronger home currency' is not an example of a typical effect. Generally, when a home currency strengthens, the value of remitted earnings from a foreign subsidiary to the U.S. in terms of U.S. dollars decreases. This is because the conversion from a foreign currency to a stronger U.S. dollar will result in fewer dollars being received. Conversely, exchange rate fluctuations can benefit U.S. firms when the home currency weakens. It makes products denominated in the home currency cheaper for foreign customers, potentially increasing demand for the MNC's products (option b).

A stronger home currency can make exported goods more expensive for foreign buyers, potentially reducing demand (option c). When the home currency is weaker, remittances from foreign subsidiaries may increase in terms of the home currency (option d). Additionally, exchange rate changes can affect the cost of foreign supplies (option e). The correct answer is d. Remitted earnings from the foreign subsidiary of a U.S.-based MNC may increase due to a weaker home currency. When a U.S.-based MNC's home currency weakens, it means that the foreign currency strengthens, making the remitted earnings from the foreign subsidiary increase when converted back to the home currency. All the other options are examples of how an MNC can be affected by exchange rate movements.