1 The real exchange rate measures: o the value of a currency against the currency of the major trading partner o the exchange rate adjusted for the interest rate differential O the exchange rate adjusted for inflation O the exchange rate adjusted for taxes 2  An asset was purchased three years ago for $100,000 and can be sold for $40,000 today

1 Nominal exchange rate is the actual exchange rate that prevails for one currency in terms of another currency. Real exchange rate shows value of currencies after taking into account price level of each country that is also called inflation.

So nominal exchange rate adjusted for inflation is called real exchange rate. It measures exchange rate adjusted for inflation.

Answer is C exchange rate adjusted for inflation.

2 

MACRS 5 years depreciation rate for year 1 = 20%
MACRS 5 years depreciation rate for year 2 = 32%
MACRS 5 years depreciation rate for year 3 = 19.2%

Book value = $100,000 x (1-0.20-0.32-0.192)
= $100,000 x 0.288
= $28,800

Recapture depreciation = $40,000 - $28,800 = $11,200

Capital gain = $0

Tax liability = $11,200 x 40%
= $4,480