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Chapter 4 SBD Answers

Chapter 4 SBD Answers - ANSWER The pound should depreciate...

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Chapter 4: Small Business Dilemma Assessment by the Sports Exports Company of Factors that Affect the British Pound’s Value Since the Sports Exports Company (a U.S. firm) receives payments in British pounds every month and converts those pounds into dollars, it needs to closely monitor the value of the British pound in the future. Jim Logan, owner of the Sports Exports Company, expects that inflation will rise substantially in the United Kingdom, while inflation in the U.S. will remain low. He also expects that the interest rates in both countries will rise by about the same amount. 1. Given Jim's expectations, forecast whether the pound will appreciate or depreciate against the dollar over time.
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Unformatted text preview: ANSWER: The pound should depreciate because the British inflation is expected to be higher than the U.S. inflation. This could cause a shift in trade flows that would place downward pressure on the pound's value. The interest rate movements of both countries are expected to be similar for both countries. Therefore, there should not be any adjustment in the capital flows between the two countries. 2. Given Jim's expectations, will the Sports Exports Company be favorably or unfavorably affected by the future changes in the value of the pound? ANSWER: The Sports Exports Company will be unfavorably affected, because depreciation in the British pound will cause the pound receivables to convert into fewer dollars....
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