The exchange rate between Pounds and US dollars is determined by the intersection of the demand...

The exchange rate between Pounds and US dollars is determined by the intersection of the demand and supply curves for euros in terms of dollars. Explain how an increase in US inflation relative to English inflation will effect equilibrium exchange rates.

Solutions

Expert Solution

Inflation rates can affect the exchange rate between the two countries. If the inflation increases in the US relative to England, the US goods will become less competitive in the international goods market as their prices have now increased. Foreigners will find it difficult to purchase US goods and thus, the demand for US Dollar will go down (you need to pay for US goods in US dollars). Thus, the demand for dollar shifts tot he left and the value of dollar falls i.e. the USD will depreciate in relation to the English Pound. This is in line with the Purchasing power parity theory which states that purchasing power across nations must be the same. (Depreciating dollars compensates for the increase in prices of US goods)

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

- On April 17, 2018 the exchange rate between the Canadian dollar and the US dollars...

- On April 17, 2018 the exchange rate between the Canadian dollar and the US dollars was 1 CAD = 0.796 USD. On April 5, 2019 the exchange rate was 1 CAD = 0.780 USD. Did the Canadian dollar appreciate or depreciate and by what percent? (1 point) - Find the exchange rate in terms of US dollars per British pound if on April 5, 2019 the exchange rate between the US dollar and the Mexican peso was 1 USD...

The demand for British Pounds in exchange of Canadian Dollars is Qd = 75−10e and the...

The demand for British Pounds in exchange of Canadian Dollars is Qd = 75−10e and the supply is Qs = 45+10e, where e is the nominal exchange rate (Canadian Dollars to buy one British Pound) and Q represents the quantity of British Pounds. Suppose that the Bank of Canada wants to keep the exchange rate Canadian Dollars/Pound between 1.6 and 1.7. Assume that the Bank of Canada makes the minimum intervention to keep the exchange rate within the band. What...

The follow table list foreign exchange rates between US dollars and British pounds (GBP) during April...

The follow table list foreign exchange rates between US dollars and British pounds (GBP) during April Date U.S. Dollars per GBP 4/1 1.9564 4/4 1.9293 4/5 1.914 4/6 1.9374 4/7 1.961 4/8 1.8925 4/11 1.8822 4/12 1.8558 4/13 1.796 4/14 1.7902 4/15 1.7785 4/18 1.7504 4/19 1.7255 4/20 1.6914 4/21 1.672 4/22 1.6684 4/25 1.6674 4/26 1.6857 4/27 1.6925 4/28 1.7201 4/29 1.7512 Which day would have been the best day to convert $200 into British pounds? Which day would...

Briefly how exchange rate are determined by supply of demand.

](Currency Exchange) You are given the exchange rate from Canadian to US dollars. You are asked...

](Currency Exchange) You are given the exchange rate from Canadian to US dollars. You are asked to convert an amount either from Canadian to US or vice versa based on the user's request. Write a C++ program that prompts the user to enter: a. the exchange rate from currency in Canadian dollars to US dollars b. either 0 to convert from Canadian to US or 1 to convert from US to Canadian (the program displays a message for invalid input)...

Briefly how exchange rate are determined by supply of demand. Explain how the government maintains the...

Briefly how exchange rate are determined by supply of demand. Explain how the government maintains the value of its currency fixed with a foreign currency through buying and selling of reserves. Donald Trump official labeled China a "currency manipulator" in August 2019 (see the attached article from the New York Times). Based on what we have discussed with regard to the determination of exchange rates, what impact did this likely have in the market for Chinese Yuan (renmimbi)? Do you...

1. Suppose the exchange rate between US$ and Euro, US$ and Japanese Yen are: 1...

1. Suppose the exchange rate between US$ and Euro, US$ and Japanese Yen are: 1 US$ = 2 Euro; 1 US$ = 100 Yen. Suppose the interest rates published by central banks in the U.S., Euro zone, and Japan are 2%, 3%, and 4%, respectively; And, suppose the inflation rates in the U.S., Eurozone, and Japan are 1%, 2%, and 1%, respectively. Therefore, (calculation formula is optional) Q1.1: How much Yen can 1 Euro exchange for?...

If the spot rate for British pounds is 0.6 pounds equals 1 US $, and annual...

If the spot rate for British pounds is 0.6 pounds equals 1 US $, and annual interest rate on fixed rate one-year deposits of pounds is 3.25% and for US$ is 2.25%, what is the eighteen-month forward rate for one dollar in terms of pounds? Assuming the same interest rates, what is the 36-month forward rate for one pound in dollars? Is this an indirect or a direct rate? If the forward rate is an accurate predictor of exchange rates,...

what is exchange rate and factors that determines demand for exchange rate

1)i)A Canadian banker observes the spot rate between Canadian dollars and pounds is currently C$1.06/£ ....

1)i)A Canadian banker observes the spot rate between Canadian dollars and pounds is currently C$1.06/£ . One year inflation rates in Canada and Great Britain are expected to be 3% and 5%, respectively. Suppose the spot rates for Canadian dollars and pounds at the end of the year are as follows:C$1.07/$, £1.05/$ Which of the following statements is true according to relative PPP? Round intermediate steps to four decimals. a)The pound appreciated in real terms.b)The Canadian dollar depreciated in real...

Subjects