Question
(10points)Inthefollowingproblem,assumethattheUKcurrencyisthepoundsterling(PST)andthecurrencyintherestoftheEuropeistheeuro(EUR).SupposethatthePSTappreciatesrelativetotheEUR.Econ 736 Analytical Assignment #4 Forthefollowingparts,pleaseindicatewhathappenstothevariablesbelowbystatingwhetherthey:increase,decrease,orstaysthesame,alongwithasinglesentenceasexplanationforwhy.Youwillnotreceiveanycreditwithoutprovidinganexplanation.a.(1pteach)IntheUK: Howwouldtheexportdemandchange?Why? Howwouldtheimportdemandchange?Why? Howwouldnetexportschange?Why?b.(1pteach)IntherestofEurope: Howwouldexportdemandchange?Why? Howwouldimportdemandchange?Why? Howwouldnetexportschange?Why?c.(4pts)SupposethatthecentralbankintheUK(TheBankofEngland)decidestoraiseinterestratesbecauseitisworriedabouthighinflation.Asaresult,interestratesintheUKbecomehigherthaninterestratesintheRESTOFEUROPE.ThisactsasanincentiveforEUROPEANinvestorstoincreasetheamountoffundstheyinvestinBritish(UK)interestbearingassets.InordertoincreasetheirpurchasesofthoseUKassets,whicharepricedinPST,EUROPEANinvestorshavetoconvertEURintoPST.Thisconversion,inturn,increasesthedemandforPST.Basedontheaboveinformation,pleaseexplain:i) (1pt)GiventhatinterestratesintheUKarenowdifferentthanthatinEurope,whatequation/conditionmaybeusedtoexplainthisbehaviorofthe(nominal)exchangerate.(Note:youjustneedtostatethenameoftheequationorconditionthatmaybeused).ii) (1pt)whatwillhappentotheEURPSTexchangerate.Inotherwords,willtheincreaseddemandforPST,makePSTgainvalue(appreciate)orlosevalue(depreciate)againsttheEUR?(Pleaseindicateyouranswerbypickingoneofthefollowing:Appreciate/Depreciate/Staythesame.iii) (2pts)Why?Pleasegiveabriefexplanationusingwhatyouchoseinpartc(i).
(10points)Inthefollowingproblem,assumethattheUKcurrencyisthepoundsterling(PST)andthecurrencyintherestoftheEuropeistheeuro(EUR).SupposethatthePSTappreciatesrelativetotheEUR.Econ 736 Analytical Assignment #4 Forthefollowingparts,pleaseindicatewhathappenstothevariablesbelowbystatingwhetherthey:increase,decrease,orstaysthesame,alongwithasinglesentenceasexplanationforwhy.Youwillnotreceiveanycreditwithoutprovidinganexplanation.a.(1pteach)IntheUK: Howwouldtheexportdemandchange?Why? Howwouldtheimportdemandchange?Why? Howwouldnetexportschange?Why?b.(1pteach)IntherestofEurope: Howwouldexportdemandchange?Why? Howwouldimportdemandchange?Why? Howwouldnetexportschange?Why?c.(4pts)SupposethatthecentralbankintheUK(TheBankofEngland)decidestoraiseinterestratesbecauseitisworriedabouthighinflation.Asaresult,interestratesintheUKbecomehigherthaninterestratesintheRESTOFEUROPE.ThisactsasanincentiveforEUROPEANinvestorstoincreasetheamountoffundstheyinvestinBritish(UK)interestbearingassets.InordertoincreasetheirpurchasesofthoseUKassets,whicharepricedinPST,EUROPEANinvestorshavetoconvertEURintoPST.Thisconversion,inturn,increasesthedemandforPST.Basedontheaboveinformation,pleaseexplain:i) (1pt)GiventhatinterestratesintheUKarenowdifferentthanthatinEurope,whatequation/conditionmaybeusedtoexplainthisbehaviorofthe(nominal)exchangerate.(Note:youjustneedtostatethenameoftheequationorconditionthatmaybeused).ii) (1pt)whatwillhappentotheEURPSTexchangerate.Inotherwords,willtheincreaseddemandforPST,makePSTgainvalue(appreciate)orlosevalue(depreciate)againsttheEUR?(Pleaseindicateyouranswerbypickingoneofthefollowing:Appreciate/Depreciate/Staythesame.iii) (2pts)Why?Pleasegiveabriefexplanationusingwhatyouchoseinpartc(i).
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