Assume that the interest parity condition holds. Also assume that the one-year U.S. interest rate is 4% while the one-year U.K. interest rate is 6%. Given this information, financial markets expect the U.K. pound to:depreciate by 2% today.depreciate by 2% over the next year.appreciate by 2% over the next year.appreciate by 2% today.be unchanged

Assume that the interest parity condition holds. Also assume that the one-year U.S. interest rate is 4% while the one-year U.K. interest rate is 6%. Given this information, financial markets expect the U.K. pound to:depreciate by 2% today.depreciate by 2% over the next year.appreciate by 2% over the next year.appreciate by 2% today.be unchanged

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter11: Foreign Exchange, Trade, And Bubbles

Section: Chapter Questions

Problem 6MC

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QUESTION 18Assume that the interest parity condition holds. Also assume that the one-year U.S. interest rate is 4% while the one-year U.K. interest rate is 6%. Given this information, financial markets expect the U.K. pound to: depreciate by 2% today. depreciate by 2% over the next year. appreciate by 2% over the next year. appreciate by 2% today. be unchanged
Consider that Britain is trying to maintain a fixed exchange rate with respect to the U.S. dollar. However, the present situation in the foreign exchange market is conducive for the British pound to appreciate with respect to the U.S. dollar. Which of the following interventions is most likely in this situation? The government of Britain should sell pounds and buy dollars. The government of Britain should do nothing, as a fixed rate cannot change. The government of Britain should buy pounds and sell dollars. The government of Britain should decrease the country's money supply.
There is a flexible exchange rate system and only two countries in the world, the United States and Mexico. If the inflation rate in the United States rises relative to the inflation rate in Mexico, it follows that both the dollar and the peso will appreciate, although the peso will appreciate before the dollar appreciates. both the dollar and the peso will depreciate, although the peso will depreciate before the dollar depreciates. the dollar will appreciate, and the peso will depreciate. There is not enough information to answer the question. the dollar will depreciate, and the peso will appreciate.
To keep the U.S. dollar from depreciating against the Japanese yen, the U.S. Federal Reserve must Buy Yen and sell U.S. dollars. Buy both Yen and U.S. dollars. Sell Yen and buy U.S. dollars. Sell both Yen and U.S. dollars.
If the exchange rate between the U.S. dollar and Japanese yen changes from $1=70 yen to $1=100 yen, then: All Japanese producers and consumers will lose. U.S. auto producers and autoworkers will lose. U.S. consumers of Japanese TV sets will benefit. Japanese tourists to the U.S. will benefit.
If the equilibrium exchange rate changes so that it takes more dollars to buy a British pound, then: the dollar has appreciated in value. Americans will import more British goods. the British will buy fewer U.S. goods. the dollar has depreciated in value.
Assume that the uncovered interest parity condition holds. Also assume that the U.S. interest rate is greater than the U.K. interest rate. Given this information, we know that investors expect:the pound to depreciate.the pound to appreciate.the dollar-pound exchange rate to remain fixed.the U.S. interest rate to fall.none of the above
Assume the interest parity condition holds and that initially domestic and foreign interest rates are equal, i.e., i = i*. A reduction in the domestic interest rate will cause:an increase in the demand for the domestic currency.an immediate increase in the current domestic exchange rate, E.an expected appreciation of the domestic currency over time.all of the above
If the annual inflation rate is 5.5 percent in the United States and 4 percent in the U.K., and the dollar depreciated against the pound by 3 percent, then the real exchange rate, assuming that PPP initially held, is: 0.07 0.98 1.05 7.3
Prices in Country A sharply rose due to a supply shortage and led to high levels of inflation in the economy. What effect is this price increase likely to have on domestic currency in the foreign exchange market? Country A's domestic currency will see an appreciation, in relation to currencies of other trading partners. Country A's domestic currency will see both appreciation and depreciation, in relation to currencies of other trading partners. Country A's domestic currency will see no change, in relation to currencies of other trading partners. Country A's domestic currency will see a depreciation, in relation to currencies of other trading partners. There is insufficient information to draw a conclusion.
An appreciation of the exchange value of the U.S. dollar would: A) increase the dollar prices of U.S. imports and the foreign cost of exports from the U.S. B) decrease the dollar prices of U.S. imports and the foreign cost of exports from the U.S. C) increase the dollar prices of U.S. imports, but decrease the foreign cost of exports from the U.S. D) decrease the dollar prices of U.S. imports, but increase the foreign cost of exports from the U.S.
Suppose that the U.S. dollar appreciates against the Japanese Yen. What will occur as a result? purchasing power parity will begin to hold U.S. exports to Japan will become cheaper and increase, imports from Japan to the U.S. will become more expensive and decline U.S. currency becomes over-valued relative to Japanese currency U.S. exports to Japan will become more expensive and decline, imports from Japan to the U.S. will become cheaper and increase