Analysis of Factors Affecting the Equilibrium Exchange Rates of the $/

Assumptions:

1. Analysis of Factors Affecting the Equilibrium Exchange Rates of the S/E 2. US interest rates increases relative to UK interest rates Assumptions: => US and UK goods are perfect substitutes Consider investors have the choice of investing funds in the USA or UK => Initial equilibrium exchange rate is $1.50/f Arrows Why? Explain If exchange rates increases, assume it goes to $1.75/f Demand What happens to the demand of If exchange rates decreases, assumes it falls $1.30/f analysis the British pound by US citizens? US Inflation increases relative to UK inflation Arrows Why? Explain Supply What happens to the demand of Demand |What happens to the demand of analysis USD (=supply of pound) by the analysis US goods by USA citizens? British? What happens to the demand of How does this affect the equilibrium UK goods by USA citizens? exchange rate? Illustrate using a graph. Clearly label the graph. Use dotted lines to show the ies for Co and e1 en= e1 = How does this affect the demand of the pound by US Did the British pound appreciate or Formula: Calculations: depreciate? Answer: Supply What happens to the demand of Did the UD dollar appreciate or depreciate? Formula: Calculations: analysis US goods by the British Answer: Conclusion: How does this affect the demand of USD by the British? How does this affect the supply of the pound? How does this affect the equilibrium exchange rate? Illustrate using a graph. Clearly label the graph. Use dotted lines to show the shifts. Give the values for Co and e1 eo= e1= Did the British pound appreciate or Formula: Calculations: depreciate? Answer: Did the UD dollar appreciate or depreciate? Formula: Calculations: Answer Conclusion