Ch.4 HW_Part 2 - Shaun [email protected] FIN 4613 HW Ch.4...

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Shaun Lanshe @00717301 9/25/09 FIN 4613 HW Ch.4 : Exchange Rate Determination Questions (2-5, 10, 20, 21) 2) Inflation Effects on Exchange Rates: If the US inflation rate became high relative to the inflation rate in Canada: a) US demand for Canadian dollars will increase as the US demand for Canadian goods/services will increase, b) the supply of Canadian dollars for sale will decrease as Canadian demand for US goods/services will decrease, and c) the equilibrium value of the Canadian dollar will increase (increased demand + decreased supply). 3) Interest Rate Effects on Exchange Rates: If US interest rates fell relative to British rates: a) US demand for British pounds will increase as US demand to invest in the higher UK rates will increase, b) the supply of British pounds for sale will decrease as the British demand to invest in the US will decrease, and c) the equilibrium value of the British pound will increase (increased demand + decreased supply).
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