In: Finance
Assume that the United States invests heavily in government and
corporate securities of South Korea (hereafter, ‘Korea’). In
addition, residents of Korea invest heavily in the United States.
Approximately $20 billion worth of investment transactions occur
between these two countries each year. The total dollar value of
trade transactions per year is about $15 million. This information
is expected to also hold in the future.
Explain how each of the following conditions will affect the value
of Korean currency, won, holding other things equal.
a) U.S. inflation has suddenly increased substantially, while
Korean inflation remains low.
b)U.S. interest rates have increased substantially, while Korean
interest rates remain low. Investors of both countries are
attracted to high interest rates.
c) The U.S. income level increased substantially, while Korean
income level has remained unchanged
d) The U.S. is expected to impose a small tariff on goods imported
from Korea.
e) Combine all expected impacts to develop an overall forecast.