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 6 ​percent, the​ dollar/pound exchange rate moves from ​$1.31 per pound to ​$1.65 per​ pound, and the dollar prices increase by 9 percent. The real rate of return will be nothing 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 is -1.9%.

Step-by-step explanation:

The real dollar rate of return can be calculated as follows:

Step 1: Convert the initial deposit of 10,000 pounds sterling into dollars at the initial exchange rate of $1.31 per pound. 10,000 pounds * $1.31 = $13,100.

Step 2: Calculate the interest earned on the deposit in pounds. 10,000 pounds * 6% = 600 pounds.

Step 3: Convert the interest earned in pounds into dollars at the final exchange rate of $1.65 per pound. 600 pounds * $1.65 = $990.

Step 4: Calculate the increase in dollar prices by 9% and apply it to the initial deposit and interest earned in dollars. ($13,100 + $990) * 9% = $1,242.90.

Step 5: Subtract the increase in dollar prices from the total amount in dollars. ($13,100 + $990) - $1,242.90 = $12,847.10.

Step 6: Calculate the percentage change in the total amount in dollars compared to the initial deposit. (($12,847.10 - $13,100) / $13,100) * 100 = -1.93%.

Therefore, the real rate of return on the 10,000 pound sterling deposit is -1.9%.

Answer 2

The real rate of return is 23.0%.

Step-by-step explanation:

This can be calculated as follows:

Gain due to dollar depreciation = (1.65 - 1.31) / 1.31 = 0.260, or 26.0%

Inflation rate = Increase in dollar price = 9%

Real rate of return = (Gain due to dollar depreciation + Interest rate on pounds) - Inflation rate = (26.0% + 6%) - 9% = 23.0%

Therefore, the real rate of return is 23.0%.