9 9. (TCO E and I) Let the exchange rate be defined as the number of dollars per

Question

9 9. (TCO E and I) Let the exchange rate be defined as the number of dollars per British pound. Assume there is a decrease in U.S. interest rates relative to that of Britain. (a.) (10 points) Would this event cause the demand for the dollar to increase or decrease relative to the demand for the pound? Why? (b.) (10 points) Has the dollar appreciated or depreciated in value relative to the pound? (c.) (10 points) Does this change in the value of the dollar make imports cheaper or more expensive for Americans? Are American exports cheaper or more expensive for importers of U.S. goods in Great Britain? Illustrate by showing the price of a U.S. cell phone in Britain before and after the change in the exchange rate. (d.) (10 points) If you had a business exporting goods to Britain, and U.S. interest rates fell as they have in this example, would you plan to expand production or cut back? Why? (Points : 40)

Explanation / Answer

a) The demand decreases as people pull out their money out of US banks and convert them to pound to invest in britain banks.

b) The dollar depreciates

c) Imports get more expensive as they have to pay more dollars now for the same pound. Now american exports are cheaper

d)As imports in USA get more expensive, demand falls and I will cut down the production

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