Question

Calculate the real dollar rate of return on a 10,000 pound sterling deposit in a London bank in a year when the interest rate on pounds is 10 percent, the dollaripound exchange rate moves from $1.76 per pound to $1.56 per pound, and the dollar prices increase by 7 percent. The real rate of return will be percent (Enter your response as a percentage rounded to one decimal place.)

Answer 1

The real dollar rate of return on a 10,000 pound sterling deposit can be calculated by considering the changes in the exchange rate and the inflation rate. The initial exchange rate is $1.76 per pound and the final exchange rate is $1.56 per pound. The percentage change in the exchange rate is -11.36%. The initial dollar prices are 100 and the final dollar prices, taking into account a 7% inflation rate, are 107. The percentage change in dollar prices is 7%. The real rate of return is then calculated as -18.36%.

Step-by-step explanation:

To calculate the real dollar rate of return on a 10,000 pound sterling deposit, we need to take into account the changes in the exchange rate and the inflation rate. First, let's calculate the change in the exchange rate:

1. Initial exchange rate: $1.76 per pound
2. Final exchange rate: $1.56 per pound
3. Percentage change in exchange rate: ((Final exchange rate - Initial exchange rate) / Initial exchange rate) * 100 = ((1.56 - 1.76) / 1.76) * 100 = -11.36%

Next, let's calculate the change in the dollar prices:

1. Initial dollar prices: 100
2. Final dollar prices: Initial dollar prices + (Initial dollar prices * inflation rate) = 100 + (100 * 0.07) = 107
3. Percentage change in dollar prices: ((Final dollar prices - Initial dollar prices) / Initial dollar prices) * 100 = ((107 - 100) / 100) * 100 = 7%

Finally, let's calculate the real rate of return:

Real rate of return = Percentage change in pound value - Percentage change in dollar prices = -11.36% - 7% = -18.36%