Question

At t0 the exchange rate is $1.00/£. At t1 the exchange rate is $0.9130/£. Over this...

At t0 the exchange rate is $1.00/£. At t1 the exchange rate is $0.9130/£. Over this period inflation increased 15 percent in the UK and 5 percent in the US. The real exchange rate at t1 is

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

At t1 the exchange rate is $0.9130/Pound.

Increase in Inflation = 15% in time t1-t0 in UK and 5% in US. Due to inflation the value of currency will depreciate for both countries but it will depreciate more in magnitude in UK. $0.9130 due to the impact of 5% inflation becomes 0.86735 in US. Pound 1 in UK becomes 0.85 pound due to15% inflation. Hence at exchange figure becomes 0.86735 dollar equals 0.85 pound; Hence, $1 = 0.85/0.86735 = 0.98 pound

Hence 1 pound = 1/.98 = 1.0204 dollar.

Therefore, the real exchange rate equals $1.0204/Pound sterling.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
At the beginning of the year the exchange rate between the Brazilian real and the U.S....
At the beginning of the year the exchange rate between the Brazilian real and the U.S. dollar was 2.2 reals per dollar. Over the year, Brazilian inflation was 12 percent and U.S. inflation was 4 percent. If purchasing power parity holds, at year-end the exchange rate should be approximately ________________ dollars per real. 2.3913 0.4895 2.8498 0.4182 0.3440
Three-years ago the AUD/ARS exchange rate was 11.66 and today the exchange rate now sits at...
Three-years ago the AUD/ARS exchange rate was 11.66 and today the exchange rate now sits at AUD/ARS 41.80. Australia has had inflation rates of 1.97%, 1.93% and 1.61% over the last 3 years. In Argentina the inflation rates have been 33%, 25% and 55%. (a) Calculate today's real FX value of the AUD adjusted for the past three year's inflation differential (show all working). (b) Has the AUD appreciated or depreciated in real terms over the three-year period against the...
Three-years ago the USD/AMD exchange rate was 478.16 and today the exchange rate now sits at...
Three-years ago the USD/AMD exchange rate was 478.16 and today the exchange rate now sits at USD/AMD 485.71. Armenian inflation has been at rates of 1.44%, 1.08% and 1.55% over the last 3 years. In the U.S., the inflation rates have been 1.8%, 2.4% and 2.1%. (a) Calculate today's real FX value of the USD adjusted for the past three year's inflation differential (show all working). (b) Has the USD appreciated or depreciated in real terms over the three-year period...
1. Suppose the initial Brazilian real to US dollar exchange rate is 4 reals (or “reais”)...
1. Suppose the initial Brazilian real to US dollar exchange rate is 4 reals (or “reais”) to 1 US dollar. The cost to buy a specified market basket of same quality products is $500,000 in the U.S. and R$1,400,000 in Brazil. Valued in U.S. dollar terms, the market basket in Brazil costs $350,000. (This market basket cost represents the combined price of thousands of products, and so also indicates an average price for those products.) (a) Consider the incentives of...
At the start of the year, the exchange rate was $1.345/€. At the end of the...
At the start of the year, the exchange rate was $1.345/€. At the end of the year, the exchange rate is $1.272/€. If U.S. inflation was 5% and European inflation was 13%, what has been the nominal and real change in the value of the Euro (versus the USD)? Show work Given your answer above, what has happened to European export industry competitiveness over the year? (looking for improved or weakened/deteriorated)
Suppose the inflation rate is expected to be 1.1 percent in the U.S. and 1.8 percent...
Suppose the inflation rate is expected to be 1.1 percent in the U.S. and 1.8 percent in South Korea in 2020. a.        If the nominal interest rate on the 10-year U.S. Treasury bond is 2.4 percent, what is the real interest rate on that instrument? b.        If the nominal exchange rate between the U.S. dollar and the South Korean Won is expected to fall by 5 percent by the end of the year, what is the change in...
Suppose Russia’s inflation rate is 100 percent over one year but the inflation rate in Switzerland...
Suppose Russia’s inflation rate is 100 percent over one year but the inflation rate in Switzerland is only 5 percent. According to relative PPP, what should happen over the year to Swiss franc’s exchange rate against the Russian ruble?
Find the hedge ratio a 1-period at-the-money put option on ¥300,000. The spot exchange rate is...
Find the hedge ratio a 1-period at-the-money put option on ¥300,000. The spot exchange rate is ¥100 = $1.00. In the next period, the yen can increase in dollar value by 15 percent or decrease by 10 percent. The risk-free rate in dollars is i$ = 5%; The risk-free rate in yen is i¥ = 1%. A.-0.44 B.-0.66 C.-0.60 D.-0.40
Suppose the nominal exchange rate is 1,000 Chilean pesos per UK pound. Further, suppose the price...
Suppose the nominal exchange rate is 1,000 Chilean pesos per UK pound. Further, suppose the price of a bushel of UK wine is £5 per bottle and the price of a bottle of Chilean wine is 7,500 pesos. What is the real exchange rate between Chile and the UK in terms of wine in UK? Select one: RER=0.001*7500/5=1.5 none of the answers RER=1000*5/7500=0.67 RER=0.001*5/7.5=0.0015
11. Canada’s inflation rate is 2% over one year but the inflation rate in the US...
11. Canada’s inflation rate is 2% over one year but the inflation rate in the US is only 1%. According to PPP what should happen to the US dollar / Canadian dollar exchange rate? A) The US dollar depreciates in the long run B) The Canadian dollar depreciates in the long run C) Inflation has no effect on the exchange rate in the long run D) We cannot tell the effect of exchange rate in the long run without information...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT