Question

1. (2 pts) Percentage Appreciation. Assume the spot rate of the British pound is $1.242. The expected spot rate one year from now is assumed to be $1.278. What percentage appreciation does this reflect?

            

2. (3 pts) Interest Rate Effects on Exchange Rates. Assume U.S. interest rates fall relative to British interest rates. Other things being equal, how should this affect the (a) U.S. demand for British pounds, (b) supply of pounds for sale, and (c) equilibrium value of the pound?

1. (3 pts) Trade Restriction Effects on Exchange Rates. Assume that the Japanese government relaxes its controls on imports by Japanese companies. Other things being equal, how should this affect the (a) U.S. demand for Japanese yen, (b) supply of yen for sale, and (c) equilibrium value of the yen?

Answer 1

1) Percentage appreciation = (Value after one year - Spot rate)/Spot rate

= (1.278-1.242)/1.242

= 0.036/1.242

= 0.028986

i.e 2.8986%

2) When U.S. interest rates fall relative to British interest rates, investors will rush to invest in british market and hence

a)U.S Demand for british pounds will increase , b) Supply for pounds will decerase and c) equilibrium value of pound should increase

3) If Japanses government relaxes its control on import by japanses firm, then japanese firm will start to import more and hence there will be excess supply of japanese yen and thus it's value will decrease

Thus a) There will be no effect on U.S Demand for japanese yen

b) Supply for yen for sale would increase

c) equilibrium value of yen should decrease