Workshop 3
1) Assume the spot rate of the British pound is $1.73. The expected spot rate one year from now is assumed to be $1.66. What percentage depreciation does this reflect? [$1.66 – $1.73]/$1.73 = –4.05%
Hence, the expected depreciation is 4.05%.
2) Assume that the U.S. inflation rate becomes high relative to Canadian inflation. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar?
(a) The demand for Canadian dollars should increase.
(b) The supply of Canadian dollars for sale should decrease.
(c) The equilibrium value of the Canadian dollar should increase.
3) Assume U.S. interest rates fall relative to British interest rates. Other things being equal, how should this affect the (a) U.S. demand for British pounds, (b) supply of pounds for sale, and (c) equilibrium value of the pound?
(a) The U.S. demand for British ponds should increase.
(b) The supply of pounds for sale should decrease.
(c) The equilibrium value of the pound should increase.
4) The terrorist attacks on the U.S. on September 11, 2001 were expected to weaken U.S. economic conditions, and reduce U.S. interest rates. How do you think the weaker U.S. economic conditions would affect trade flows? How would this have affected the value of the dollar (holding other factors constant)? How do you think the lower U.S. interest rates would have affected the value of the U.S. dollar (holding other factors constant)?
The weaker U.S. economic conditions would affect trade flows in that there will be a reduced demand for foreign products. This would then result in a decrease in demand for foreign currencies which then places downward pressure on currencies relative to the dollar; all other factors held constant. The lower U.S. interest rates would affect the value
Hence, the expected depreciation is 4.05%.
2) Assume that the U.S. inflation rate becomes high relative to Canadian inflation. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar?
(a) The demand for Canadian dollars should increase.
(b) The supply of Canadian dollars for sale should decrease.
(c) The equilibrium value of the Canadian dollar should increase.
3) Assume U.S. interest rates fall relative to British interest rates. Other things being equal, how should this affect the (a) U.S. demand for British pounds, (b) supply of pounds for sale, and (c) equilibrium value of the pound?
(a) The U.S. demand for British ponds should increase.
(b) The supply of pounds for sale should decrease.
(c) The equilibrium value of the pound should increase.
4) The terrorist attacks on the U.S. on September 11, 2001 were expected to weaken U.S. economic conditions, and reduce U.S. interest rates. How do you think the weaker U.S. economic conditions would affect trade flows? How would this have affected the value of the dollar (holding other factors constant)? How do you think the lower U.S. interest rates would have affected the value of the U.S. dollar (holding other factors constant)?
The weaker U.S. economic conditions would affect trade flows in that there will be a reduced demand for foreign products. This would then result in a decrease in demand for foreign currencies which then places downward pressure on currencies relative to the dollar; all other factors held constant. The lower U.S. interest rates would affect the value