Cherryland, an imaginary country somewhere in the world invests heavily in government and corporate securities of the United States. In addition, Americans invest heavily in Cherryland. Approximately $10 billion worth of investment transactions occur between these two countries each year. On the other hand, the total dollar value of trade transactions per year is about $50 million. This information is expected to hold also in the near future. Because most of your firms exports goes to Cherryland, your job as international cash manager requires you to forecast the fluctuations in the value of the cherrio, the currency of Cherryland, with respect to the U.S. dollar.

Questions:

1) Explain how each of the following scenarios, holding other things equal, will affect the value of the cherrio. Scenarios:

a. U.S. inflation has suddenly increased substantially, while inflation in Cherryland remains low.

b. Real interest rates have increased substantially in the U.S.; while real interest rates in Cherryland remain low.

c. The U.S. income level increased substantially, while in Cherryland income level has remained unchanged.

d. The U.S. is expected to impose a small tariff on goods imported from Cherryland.

2) Aggregate all of these impacts to develop an overall forecast of the cherrios movement against the U.S. dollar.