Answer to Question 1
Answer: Before the 1960s, inflation rates were very low (almost zero), and interest rates averaged about 4 to 5. Starting in the 1960s, however, both inflation and interest rates began to rise and rose to a peak in the period from 1981-1982. They then eventually fell back to their normal range in the 1990s. In the first part of the 21st century, rates have again been lower than the long-run average.
Answer to Question 2
Political risk can arise if the foreign subsidiary conducts its business in a politically unstable country. A change in a
country's political environment frequently brings a change in policies with respect to businessesNand especially with
respect to foreign businesses.
Some examples of political risk are as follows:
1. Expropriation of plants and equipment without compensation
2. Expropriation with minimal compensation that is below actual market value
3. Non-convertibility of the subsidiary's foreign earnings into the parent's currencyNthe problem of blocked funds
4. Substantial changes in tax rates
5. Governmental controls in the foreign country regarding the sale price of certain products, wages and
compensation paid to personnel, the hiring of personnel, transfer payments made to the parent, and local borrowing
6. Requirements regarding the local ownership of the business
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