International Finance

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Chapter 4

Practice Problems

Percentage Depreciation
• Assume the spot rate of the British pound is $1.73. The expected spot rate one year from now is assumed to be $1.66. What percentage depreciation does this reflect? • ($1 66 – $1 73)/$1 73 = –4.05% ($1.66 $1.73)/$1.73 4 05% Expected depreciation of 4.05% percent

Inflation Effects on Exchange Rates
• Assume that the U.S. inflation rate becomes high relative to Canadian inflation. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar?  Demand for Canadian dollars should increase,  Supply of Canadian dollars for sale should decrease, and  The Canadian dollar’s value should increase.

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Interest Rate Effects on Exchange Rates
• Assume U.S. interest rates fall relative to British interest rates. Other things being equal, how should this affect the (a) U.S. demand for British pounds, (b) supply of pounds for sale, and (c) equilibrium value of the pound?  Demand for pounds should increase,  Supply of pounds for sale should decrease, and  The pound’s value should increase.

Income Effects on Exchange Rates
• Assume that the U.S. income level rises at a much higher rate than does the Canadian income level. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of th Canadian dollar? f the C di d ll ?  Assuming no effect on U.S. interest rates, demand for dollars should increase,  Supply of dollars for sale may not be affected, and  The dollar’s value should increase.

Trade Restriction Effects on Exchange Rates
• Assume that the Japanese government relaxes its controls on imports by Japanese companies. Other things being equal, how should this affect the (a) U.S. demand for Japanese yen, (b) supply of yen for sale, and (c) equilibrium value of the yen?  Demand...
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