Relative inflation rates affect interest rates, exchange rates, the overall econ

Question

Relative inflation rates affect interest rates, exchange rates, the overall economic health of a country, and the operations and profitability of multinational companies Consider the following statement If companies borrow from countries with low interest rates, the potential gains from the interest savings will likely be multiplied when the lending country's currency appreciates. Based on your understanding of the relationship between relative inflation rates and exchange rates, identify whether the preceding statement is valid or invalid. O The statement is invalid, because as the currency of the lending country appreciates, it becomes more expensive for the borrowing company to repay the initial loan. The statement is valid, because as the currency of the lending country appreciates, it becomes cheaper to repay the initial loan and thus increase savings. If companies borrow from countries with low interest rates, the potential gains from the interest savings will likely be by the losses from currency appreciation. The currency of a country with a higher inflation rate than Japan's inflation rate will over time against the yen. 83 3.34.1 © 2004-2016 Agia Aa "ights reserved Flash purer wiN 27,0,0,1 ©2O 1 3 Cengage Lann except as A Grade It Now rened Save & Continue

Explanation / Answer

The statement given is invalid. It will be more expensive to repay the debt taken as the currency appreciates.

Fill in the blanks

1) offset (decrease) - losses due to currency appreciation will get offset with lower interest rate benefit.

2) Depreciate- Currency with higher inflation depreciates

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