Question

Draw the demand and supply curves and provide brief explanations about the exchanger rate and the value of the domestic currency in each case. Note: you just need to state whether the dollar has appreciated or depreciated and whether the exchange rates (R) goes up or down) (after drawing the graphs).

8.         Inflation in Great Britain rose relative to the inflation rate in the U.S.

9.         The British became bullish (that is, they feel good) about the U.S. economy;

Answer 1

In both the cases, the demand for dollars will rise. in 8, the lower inflation rate in US will promise the higher real interest rates as compared to Great Britain so a higher demand and the dollars will appreciate as a result and the exchange rate will go up. In 9, being bullish means the British have a confidence in the US economy thus they will increase their investment in US economy which causes a rise in the demand for dollars thus again the appreciation of the dollar and a higher exchange rate.