Question

Using the equilibrium exchange rate determination model explain and comment the following:

1.Suppose prices start rising in the United States relative to prices in Japan. What would we expect to see happen to the dollar:yen exchange rate? Explain.

2.In 1987, the British government cut taxes significantly, raising the aftertax return on investments in Great Britain. What would be the likely consequence of this tax cut on the equilibrium value of the British pound?

3."Dollar Falls Across the Board as Fed Cuts Discount Rate to 6.5% From 7% (December 19, 1990)."

4."Canadian Dollar Likely to Fall Further On Recession and Constitutional Crisis" (September 28, 1992).