INTERNATIONAL FINANCE Analysis of Factors Affecting the Equilibrium Exchange Rates of the $ Assumptions a US and UK goods are perfect substitutes b The initial equilibrium exchange rate is $1 50 c If exchange rates increases, assumes it goes to $1 75 d If exchange rates decreases assumes it falls $1 30 UK Inflation increases relative to US inflation Goes Up or Down Why Explain Demand analysis How does this affect the demand of US goods by US citizens How does this affect the demand of UK goods by USA citizens How does this affect the demand of the British pound by US citizens Supply analysis How does this affect the demand of US goods by the British 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 e 0 and e 1 e 0 e 1 Did the British pound appreciate or depreciate Answer Formula Calculations Did the UD dollar appreciate or depreciate Answer Conclusion How does inflation in a country impact the currency

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INTERNATIONAL FINANCE

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

Assumptions:

a. US and UK goods are perfect substitutes

b. The initial equilibrium exchange rate is $1.50/

c. If exchange rates increases, assumes it goes to $1.75/ d. If exchange rates decreases assumes it falls $1.30/

UK Inflation increases relative to US inflation

		Goes Up or Down?	Why? Explain
Demand analysis	How does this affect the demand of US goods by US citizens?
	How does this affect the demand of UK goods by USA citizens?
	How does this affect the demand of the British pound by US citizens?
Supply analysis	How does this affect the demand of US goods by the British?
	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 e₀ and e₁		e₀ = e₁ =
Did the British pound appreciate or depreciate? Answer:_____________________________		Formula: Calculations:
Did the UD dollar appreciate or depreciate? Answer:_____________________________
Conclusion? How does inflation in a country impact the currency?