Question #1:

What happens to equilibrium exchange rates if US Inflation increases relative to UK inflation? Assumptions: a. US and UK goods are perfect substitutes b. The initial equilibrium exchange rate is $1.50/ c. If exchange rates increases assume it goes to $1.8/ d. If exchange rates decreases assumes it falls $1.20/

1. Demand analysis:

a. What happens to the demand of the British pound? (Write up or down)

b. Fully Explain

c. How does this affect the demand curve? (Write Right of Left shift)

2. Supply analysis

a. What happens to the supply of the British pound? (Write up or down)

b. Fully Explain

c. How does this affect the supply curve? (Write Right of Left shift)

3. Did the British pound appreciate or depreciate?

Formula: Calculations:

4. Conclusion?

How does inflation impact equilibrium exchange rates?

Question #2

Data:

3/23/2021 exchange rate = $.50 per NZ$

4/23/2021 expected exchange rate = $.52 per NZ$

Interest rate:

US: 6.72% - 7.20%

New Zealand: 6.48% - 6.96%

List the six steps how to capitalize on interest rates and exchange rate movements to make a profit:

1.

2.

3.

4.

5.

6.