Anthem College Analysis of Factors Affecting Equilibrium Exchange Rates Questions

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Analysis of Factors Affecting the Equilibrium Exchange Rates of the $/£

Assumptions:

a. US and UK goods are perfect substitutes

b. Initial equilibrium exchange rate is $1.50/£

c. If exchange rates increases, assumes it goes to $1.75/£ d. If exchange rates decreases, assumes it falls $1.30/£

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Analysis of Factors Affecting the Equilibrium Exchange Rates of the $/£ Assumptions: a. US and UK goods are perfect substitutes b. Initial equilibrium exchange rate is $1.50/£ c. If exchange rates increases, assumes it goes to $1.75/£ d. If exchange rates decreases, assumes it falls $1.30/£ a. US Inflation increases relative to UK inflation Arrows Why? Explain Demand What happens to the demand of analysis US goods by USA citizens? What happens to the demand of UK goods by USA citizens? How does this affect the demand of the pound by USA citizens? Supply analysis What happens to the demand of US goods by the British? How does this affect the demand of USD by the British? How does this affect the supply of the pound? How does this affect the equilibrium exchange rate? Illustrate using a graph. Clearly label the graph. Use dotted lines to show the shifts. Give the values for e0 and e1 e0 = Did the British pound appreciate or depreciate? Answer:_____________________________ Did the UD dollar appreciate or depreciate? Answer:_____________________________ Formula: Calculations: Formula: Calculations: e1 = Conclusion? b. US interest rates increases relative to UK interest rates Consider investors have the choice of investing funds in the USA or UK Arrows Why? Explain Demand What happens to the demand of analysis the British pound by US citizens? Supply analysis What happens to the demand of USD by the British? How does this affect the equilibrium exchange rate? Illustrate using a graph. Clearly label the graph. Use dotted lines to show the shifts. Give the values for e0 and e1 e0 = Did the British pound appreciate or depreciate? Answer:_____________________________ Did the UD dollar appreciate or depreciate? Answer:_____________________________ Formula: Calculations: e1 = Formula: Calculations: Conclusion: c. US income increases relative to UK income Arrows Why? Explain Demand What happens to the demand of analysis the British pound by US citizens? Supply analysis What happens to the demand of USD by the British? How does this affect the equilibrium exchange rate? Illustrate using a graph. Clearly label the graph. Use dotted lines to show the shifts. Give the values for e0 and e1 e0 = Did the British pound appreciate or depreciate? Answer:_____________________________ Formula: Calculations: e1 = Did the UD dollar appreciate or depreciate? Answer:_____________________________ Formula: Calculations: Conclusion: d. Government Controls : UK imposes trade barriers (e.g. increase tax withholdings) & raises taxes on foreign earned income Arrows Why? Explain Demand What happens to the demand of analysis the British pound by US citizens? Supply analysis What happens to the demand of USD by the British? How does this affect the equilibrium exchange rate? Illustrate using a graph. Clearly label the graph. Use dotted lines to show the shifts. Give the values for e0 and e1 e0 = Did the British pound appreciate or depreciate? Answer:_____________________________ Did the UD dollar appreciate or depreciate? Answer:_____________________________ Formula: Calculations: e1 = Formula: Calculations: Conclusion: e. Expectations: British pound expected to appreciate Arrows Why? Explain Demand What happens to the demand of analysis the British pound by US citizens? Supply analysis What happens to the demand of USD by the British? How does this affect the equilibrium exchange rate? Illustrate using a graph. Clearly label the graph. Use dotted lines to show the shifts. Give the values for e0 and e1 e0 = e1 = Did the British pound appreciate or depreciate? Answer:_____________________________ Did the UD dollar appreciate or depreciate? Answer:_____________________________ Formula: Calculations: Formula: Calculations: Conclusion: Q6.Explain the following and use examples if possible. a. What is the difference between the Spot rate vs forward rate? b. What is the difference between the direct vs indirect quotes? c. List the steps to obtain exchange rates from FRED d. What is the goal of financial management? e. Is the Shrimp Case in line with the goal of financial management? Fully explain. f. Explain the following: Agency relationship/Agency problem/Agency costs/Best solution to the agency problem g. Can you identify the agency relationships/problems/solutions in the Shrimp Case? h. What is the difference between the Centralized vs De-centralized management structure? i. What is cross rates?
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Analysis of Factors Affecting the Equilibrium Exchange Rates of the $/£
Assumptions:
a. US and UK goods are perfect substitutes
b. Initial equilibrium exchange rate is $1.50/£
c. If exchange rates increases, assumes it goes to $1.75/£
d. If exchange rates decreases, assumes it falls $1.30/£
a. US Inflation increases relative to UK inflation
Arrows
Why? Explain
Demand What happens to the demand
Decrease
analysis of US goods by USA citizens?
This is due to the inflation
of the US which will
increase the price level
that will decrease the
demand

Supply
analysis

What happens to the demand
of UK goods by USA
citizens?

Increase

How does this affect the
demand of the pound by USA
citizens?

Increase

What happens to the demand
of US goods by the British?

Decrease

Lower inflation in UK
compare to US will make
the UK goods cheaper for
US citizens thereby
increasing the demand of
UK goods by the US
citizens

Lower inflation in UK
compare to US will make
the UK goods cheaper for
US citizens thereby
increasing the demand of
UK goods by the US
citizens. Increasing
demand of UK goods by
the US citizens will in
return increase the
demand for pound by
USA citizens

Increasing price level of
US goods will make it
costlier for British that
will reduce the demand
for US goods

How does this affect the
demand of USD by the
British?

Decrease Increasing price level of
US goods will make it
costlier for British that
will reduce the demand
for US goods by the
British. This will in
return reduce the
demand for USD by
British

How does this affect the
supply of the pound?

Decrease
Lower inflation in UK
compare to US will make
the UK goods cheaper for
US citizens and the
demand of UK goods by
the US citizens will
increased. Increasing
demand of UK goods by
the US citizens will
increased the demand for
Pound by USA citizens
and decrease supply of
the Pound.

How does this affect the equilibrium
exchange rate? Illustrate using a graph.
Clearly label the graph. Use dotted lines
to show the shifts. Give the values for e0
and e1

e0 = GBP/USD =1.50
e1 = GBP/USD =1.75

Did the British pound appreciate or
depreciate?
Answer: British pound will appreciate
____________________________
Did the UD dollar appreciate or
depreciate?

Formula:
Calculations:
(1.75-1.50 = 0.25) 0.25
Formula:
Calculations:

Answer Dollar will depreciate
(1.50 - 1.75 = - 0.25) 0.25
____________________________
Conclusion?
Foreign exchange market is equilibrium at point A of the graph where
GBP/USD = 1.50. Now increasing demand for GBP shift demand curve from D
to D1 appreciating GBP to point E1 that is 1.75.

b. US interest rates increases relative to UK interest rates
Consider investors have the choice of investing funds in the USA or UK
Arrows
Why? Explain
Demand What happens to the
Decrease High interest rates will offer
analysis demand of the British
investors of US a higher
pound by US citizens?
return thus the dollar price
of pounds will increase in
return decreasing the
quantity of pounds leading
t...


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