Answer. In order to purchase a U.S. government security, the foreigner must first acquire dollars. 6. The peso value of a dollar is thus 1/0.925, or $1 = P1.081. Multinational Financial Management, 10th Edition provides corporate managers with a conceptual framework within which the key financial decisions of the multinational firm can be analyzed. Browse by Resource. Browse by Chapter. In order to stabilize the ruble's value, the Russian government must restore the public's confidence that the ruble can be held and exchanged for something of value. Otherwise, the two currencies are virtually identical and so must bear virtually identical interest rates. Answer. Answer. Lower deficits owing to a reduction in spending would convince foreigners that the chances for future inflation in the U.S. had decreased. During this same period, the dollar appreciated by 37.5%, calculated as (110 - 80)/80. The expectation of higher future inflation, combined with the central bank's unwillingness to permit ruble convertibility, should cause the ruble to fall in value, which it did. What about the Mexican stock market? Other things being equal, this increased demand for foreign exchange would reduce the pressure on the yuan to revalue and could even result in a depreciation of the yuan if the demand for foreign assets (for diversification and investment purpose, say) were sufficiently great. The G7 endorsed “flexibility” in exchange rates, a code word widely regarded as an encouragement for China and Japan to stop managing their currencies. Wild, 7/E solutions manual and test bank by John J. Alternatively, the government can control the exchange rate directly by setting a price for its currency and then restricting access to the foreign exchange market. The combination of the desire to hold more dollars because of political fears brought about by new problems with Iraq and the reduced appeal of investing in Germany because of the possibility of lower interest rates there, led to a large increase in capital flows to the United States. 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