Question

# The current dollar−pound exchange rate is \$2 per British pound. A U.S. basket that costs \$100...

The current dollar−pound exchange rate is \$2 per British pound. A U.S. basket that costs \$100 would cost \$140 in the United Kingdom. For the next year, the U.S. Fed is predicted to keep U.S. inflation at 2% and the Bank of England is predicted to keep U.K. inflation at 3%. The speed of convergence to absolute PPP is 15% per year.

1. (Scenario: Monetary Approach in the Long-run) What is the current U.S. real exchange rate with the United Kingdom?

A) 1.4 B) 0.8 C) 0.71 D) 1.2

2. (Scenario: Monetary Approach in the Long-run) What do you predict the U.S. real exchange rate with the United Kingdom will be in one year’s time?

A) 1.34 B) 0.86 C) 1.17 D) 1.2

1) The current US real exchange rate with the United Kingdom = 140 / 100 = 1.4 (A)

2) Convergence to absolute PPP is 15% , so each year exchange rate will adjust by 15% to reach the target : real exchange rate = 1 . Presently real exchange rate = 1.4 . So 0.4 decline is required to fulfill the condition of absolute PPP . 15% adjustment over a year would mean (2*15/100 ) = 0.03 decline in real exchange rate . So after one year real exchange rate will be = 1.4 - 0.03 = 1.37

#### Earn Coins

Coins can be redeemed for fabulous gifts.

##### Need Online Homework Help?

Most questions answered within 1 hours.

##### Active Questions
• Draw the circuit of an asynchronous counter that converts seconds into minutes. Use positive edge triggered...
• Linux: Regular Expressions file name is studentsyslog.txt Use a regular expression and grep or egrep to...
• Suppose that diastolic blood pressure readings of adult males have a bell-shaped distribution with a mean...
• Q2a. Effective managers accept the political nature of organizations. Examine individual and organizational factors that influence...
• Which of the following statements is not a limitation of consolidated financial statements? a) The group...
• 1. Why is hydrogen sulfide more soluble than carbon dioxide in the various glymes used in...