5. Everything else held constant, if real interest rates in the US would increas

Question

5. Everything else held constant, if real interest rates in the US would increase by 1% while the real interest rate in UK would increase by 0.5%, then: a. Dollar would depreciate against Pound. b. Supply of pounds would increase in the FX market. c. Demand of pounds would increase in the FX market. d. Pound would appreciate against Dollar. 6. Everything else held constant, if inflation rate increase in the US is 3% while the British inflation rate increase is 2%, then: a. US exports to UK would increase b. US imports from UK would decrease c. Dollar would appreciate against Pound d Pound would appreciate against Dollar 7, The Swiss franc depreciated by 17% against the US. dollar. This is equivalent to an appreciation of the dollar against the Swiss franc by: a, 17% b. 16.31% e. 20.48% d 17.54%

Explanation / Answer

5. Supply of Pounds would increase in the Forex market. All other factors such as inflation being constant higher interest increases the value of a country's currency and vice versa. lower interest rates tend to be unattractive for foreign investment and decrease the currency's relative value.

6. Pound would appreciate against Dollar as higher inflation rate weakens its ability to sell in foreign markets. So there is increase in supply of domestic currency and decrease in supply of foreign currency.

7. 20.48%

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