Question
A) You are given the following information. The current dollar-pound exchange rate is $2 per British pound. A U.S. basket that costs $100 would cost
A) You are given the following information. The current dollar-pound exchange rate is $2 per British pound. A U.S. basket that costs $100 would cost $120 in the United Kingdom. For the next year, the Fed is predicted to keep U.S. inflation at 2% and the Bank of England is predicted to keep U.K. inflation at 3%. The speed of convergence to absolute PPP is 15% per year.
i.What is the expected U.S. minus U.K. inflation differential for the coming year?
ii.What is the current U.S. real exchange rate,qUS/UK, with the United
Kingdom?
iii.How much is the dollar overvalued/undervalued?
iv.What do you predict the U.S. real exchange rate with the United
Kingdom will be in one year's time?
v.What is the expected rate of real depreciation for the United States
(versus the United Kingdom)?
vi.What is the expected rate of nominal depreciation for the United
States (versus the United Kingdom)?
vii.What do you predict will be the dollar price of one pound a year
from now?
B)Explain why economic similarity is such an important issue for countries deciding whether to fix or float.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started