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What will be the expected exchange rate E° and the current UK/US exchange rate E, if interest rates are unchanged? E° = E =

What will be the expected exchange rate E° and the current UK/US exchange rate E, if interest rates are unchanged? E° = E =

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Current exchange rate between UK and US dollar is E = 0.70, with market not expecting change in the %3D exchange rate over the next quarter, (E° = E) Nominal interest rates for UK and US both = 0% (iuk = 0% and ius =0 %) www www. Inflation rates for UK and US both = 0% (nuk = 0% and nus = 0%) www Assume exchange rate expectations are determined in the long run according to the Purchasing Power Parity hypothesis, while the current exchange rate is determined in the short run according to the uncovered interest parity condition. Suppose the crop failures in the UK cause inflation rate to increase to 10% in the next quarter. assume this news was not previously incorporated in the market/expected exchange rates above. Also assume nothing changed with respect to U.S. interest and inflation rates. Calculate: What will be the expected exchange rate E° and the current UK/US exchange rate E, if interest rates are unchanged? E° = E =
Transcribed Image Text:Current exchange rate between UK and US dollar is E = 0.70, with market not expecting change in the %3D exchange rate over the next quarter, (E° = E) Nominal interest rates for UK and US both = 0% (iuk = 0% and ius =0 %) www www. Inflation rates for UK and US both = 0% (nuk = 0% and nus = 0%) www Assume exchange rate expectations are determined in the long run according to the Purchasing Power Parity hypothesis, while the current exchange rate is determined in the short run according to the uncovered interest parity condition. Suppose the crop failures in the UK cause inflation rate to increase to 10% in the next quarter. assume this news was not previously incorporated in the market/expected exchange rates above. Also assume nothing changed with respect to U.S. interest and inflation rates. Calculate: What will be the expected exchange rate E° and the current UK/US exchange rate E, if interest rates are unchanged? E° = E =
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