Question

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.

Answer 1