Question: Consider the supply-demand framework for the British pound to the USD in the following diagram: Dollar price per pound (exchange rate) $1.90 $1.80 S

Consider the supply-demand framework for the British pound to the USD in the following diagram: Dollar price per pound (exchange rate) $1.90 $1.80 S D D= S S i. ii. iii. iv. Given that the UK has flexible exchange rates, can you give examples of real world factors that could cause the demand for British pounds to move from D to D', that is, from the initial equilibrium exchange to a new exchange rate of US$1.80 per 1? By what percent has the pound appreciated or depreciated against the USD? Given the effect on the pound what do you think would be the likely impact on British inflation? On British export competitiveness? Suppose, on Monday 9th March 2020 the USD was worth $1.90/. The three-month forward rate for the USD is $1.95/. Calculate the USD forward premium or discount in percentage terms. Explain what these quotes indicate for the future value of the USD and the British pound.

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