6. Safe Air Inc. located in the US imports air tanks from the German company Metallwerke, AG. If Safe Air wants to absorb all of the real exchange rate risk which one of the following contracts will be chosen?

a. Prices set in euros and adjusted for inflation in Germany.

b. Prices set in dollars and adjusted for the change in the nominal exchange rate.

c. Prices set in dollars and adjusted for inflation in the US.

7. A US based importer buys machine tools from Germany and sells them in the US. Annual revenue is $10,000 and the annual cost is 8,000 . The spot exchange rate $1.10 per .

In the following year the revenue increased by the US inflation rate of 5% and the costs in euros increased at 2% which was the inflation rate in Germany. The exchange rate remained constant. Will the real profits of the importer increase or decrease or be unaffected?

a. Unaffected

b. Decrease

c. Increase

8. A US based exporter sells US made goods in UK. The revenue last year was 1,000. The cost of goods was $800. The spot exchange rate was $1.25 per . What was the profit in dollars?

a. $400

b. $300

c. $250

9. If the inflation rate is zero in both the US and UK. The nominal exchange rate increased from $1.25 to $1.35. What will be the percentage change in the real exchange rate between dollars and pounds?

a. 10%

b. 8%

c. 0%

10. A firm reported 10% increase in nominal profits. For that year the inflation rate was 4%. What was the increase in the real profits?

a. Approximately 6%

b. Approximately 7%

c. Approximately 14%