Week 2 Class Complications Fin403
2 . Inflation Effects upon Exchange Prices. Assume that the U. H. inflation level becomes excessive relative to Canadian inflation. Other stuff being similar, how should this affect the (a) U. S. demand for Canadian us dollars, (b) flow of Canadian dollars for sale, and (c) sense of balance value in the Canadian buck?
ANSWER: With regard to Canadian dollars should maximize, supply of Canadian dollars on the market should decrease, and the Canadian dollar's benefit should increase.
3. Rate of interest Effects about Exchange Costs. Assume U. S. interest rates fall relative to British interest rates. Other things getting equal, how should this kind of affect the (a) U. T. demand for Uk pounds, (b) supply of pounds for sale, and (c) balance value of the pound?
ANSWER: Demand for pounds should enhance, supply of pounds for sale should decrease, as well as the pound's benefit should boost.
4. Salary Effects in Exchange Costs. Assume that the U. T. income level rises for a much larger rate than does the Canadian income level. Other things staying equal, how should this kind of affect the (a) U. S i9000. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium benefit of the Canadian dollar?
RESPONSE: Assuming zero effect on U. S. interest levels, demand for dollars should increase, supply of dollars for sale is probably not affected, plus the dollar's benefit should maximize.
5. Operate Restriction Effects on Exchange Rates. Assume that the Japanese federal government relaxes its controls in imports by simply Japanese firms. Other things staying equal, how should this affect the (a) U. S i9000. demand for Western yen, (b) supply of yen for sale, and (c) equilibrium value from the yen?
ANSWER: Demand for yen should not be influenced, supply of yen for sale will need to increase, as well as the value of yen should decrease.
18. Factors Impacting Exchange Prices. Mexico will have much higher inflation than the United States and also much higher rates of interest than the Us. Inflation and interest rates are more unpredictable in South america than in developing countries. The value of the Mexican peso is typically more unstable than the foreign currencies of industrialized countries from a U. S. perspective; it has commonly depreciated in one year to the next, but the amount of depreciation features varied considerably. The bid/ask spread is often wider for the balanza than for currencies of industrialized countries.
a. Identify the most obvious economic reason behind the continual depreciation of the peso.
SOLUTION: The excessive inflation in Mexico areas continual downward pressure within the value of the peso.
m. High interest rates are commonly supposed to strengthen a country's forex because they can encourage foreign investment in securities in that country, resulting in the exchange of various other currencies for that currency. But, the peso's value features declined resistant to the dollar above most years even though Mexican interest rates are normally much higher than U. H. interest rates. Therefore, it appears that the high Philippine interest rates tend not to attract substantive U. S. investment in Mexico's securities. Why do you think U. H. investors do not try to cash in on the excessive interest rates in Mexico?
RESPONSE: The excessive interest rates in Mexico derive from expectations of high inflation. That is certainly, the real interest rate in South america may not be any higher than the U. S. real interest. Given the high inflationary expectations, U. S. investors recognize the actual weakness of the peso, that could more than offset the high interest rate (when they convert the pesos back to us dollars at the end of the investment period). Therefore , the high Philippine interest rates will not encourage U. S. investment in Philippine securities, and do not help to reinforce the value of the peso.
c. Why do you think the bid/ask spread is higher for pesos than for values of developing countries? How does this influence a U. S. company that will substantial organization in Mexico?...