If the expected rate of return from the investment projects in India be 10% per annum, and if the exchange rate becomes Rs.88 per USD from Rs.80 per USD in one year, what would be the expected amount of profit in terms of US Dollar from an investment project of 100 Million USD in India from the point of view of an investor from the USA?

Question

In the case of classical economics, an increase in the nominal money stock causes

Answer 1

Factoring an expected 10% return in India, the investment would increase to 100 Million USD × 1.10 = 110 Million USD.

However, the rupee's devaluation, changing from Rs.80 to Rs.88 per USD due to exchange rate shifts, nullifies any profit when reconverting to USD.

Consequently, the USD profit is zero. Thus, option (a) is the correct answer.

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