1. Brexit has led to the relocation of many multinational companies from the United Kingdom to continental Europe. This has in turn reduced the demand for real estate and many other local goods and services in the country on a long-term basis.

(a)What is the likely long-run impact of the change in the demand for local goods and services on the real exchange rate of the British pound? Please explain your answer using the model(s) of exchange rate determination.

Answer:

(b)In addition to its impact on demand, Brexit is likely to lower the productivity of tradables in the UK. The reason is that after Brexit, British producers are likely to face hurdles in their access to the EU as their biggest trading partner, and this limits their ability to exploit the division of labor and economies of scale. What is the likely long-run impact of this change on the real exchange of the British pound? Please make sure to explain the mechanism that supports the answer you provided.

Answer: