Question

An international corporation located in Country A is considering a project in the United States. The currency in Country A​, say X​, has been strengthening relative to the U.S.​ dollar; specifically, the average devaluation of the U.S. dollar has been ​% per year​ (which is projected to​ continue). Assume the present exchange rate is units of X per U.S. dollar. a. What is the estimated exchange rate two years from​ now? b.​ If, instead, currency X was devaluing at the same rate ​(​% per​ year) relative to the U.S.​ dollar, what would be the exchange rate three years from​ now?

Answer 1

a) the US dollar would devaluate by 2.6% in the first year, that means that the exchange rate between X and the US dollar will change from 6.4X per US dollar to 6.2336X per dollar. In two years, as the US dollar devaluates even more, the exchange rate will be 6.0715X per US dollar.

b) if both currencies devaluate at the same rate, then the exchange rate between them will not vary and will still be 6.4X per US dollar.

Step-by-step explanation:

some information was missing, so I looked it up:

current exchange rate = 6.4X per US dollar

devaluation rate of US dollar = 2.6% per year