Suppose that the UK's real interest rate increases relative to the interest rate in the U.S....

 

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Suppose that the UK's real interest rate increases relative to the interest rate in the U.S. 1. Other things being equal, how should this affect the equilibrium value of the U.S dollar. Do you expect the U.S dollar to appreciate or depreciate as a result of these changes. Why? Answer the question using the demand and supply model. Be sure to explain which curve shifted and why. 2. if you are a manager of a UK business that imports from the U.S, and you expect the equilibrium value of the U.S dollar to change according to the answer in item 1, what can you do to hedge your import business? Be specific, show all your work and explain your reasoning. Your explanation determines your grade. Suppose that the UK's real interest rate increases relative to the interest rate in the U.S. 1. Other things being equal, how should this affect the equilibrium value of the U.S dollar. Do you expect the U.S dollar to appreciate or depreciate as a result of these changes. Why? Answer the question using the demand and supply model. Be sure to explain which curve shifted and why. 2. if you are a manager of a UK business that imports from the U.S, and you expect the equilibrium value of the U.S dollar to change according to the answer in item 1, what can you do to hedge your import business? Be specific, show all your work and explain your reasoning. Your explanation determines your grade.

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1 An increase in the UKs real interest rate relative to the interest rate in the US would likely lead to a decrease in the demand for US dollars and an increase in the supply of US dollars in the foreign exchange market This is because the higher real interest rates in the UK would make investing in UK assets more attractive compared to investing in US assets leading to a decrease in the demand for US dollars to purchase US assets At the same time the higher real interest rates in the UK may attract foreign investors to invest in the UK increasing the supply of US dollars in the foreign exchange market In the demand and supply model of foreign exchange an increase in the supply of US dollars and a ... View the full answer