Ch4-INTFINCQUESTIONS AND ANSWERS
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S-St-1/St-1 = Percent in foreign currency value so $1.66-$1.73/$1.73 = .04046 or 4.05% (p ) )" *
+ $ , c - $ . / # 01+ c /0$1 c / 01. $ , c ' -a)p A sudden jump in inflation in the US should cause an increase in the US demand for the Canadian goods and also causes an increase in US demand for Canadian dollars - )p The increased demand for the Canadian dollars would reduce the supply of Canadian dollars for sale -c)p There would e an upward pressure on the value of the Canadian dollars p *) )" *
+ , - $ . / # 01+ / 0$1 / 01. $ , ' -a)p British investors will reduce their demand for US dollars since the British interest rates are more attractive and there is less desire for the US ank deposits. - )p US investors with excess cash and the supply of dollars y them will increase as they esta lish more ank deposits in the British anks -c)p There would e an upward shift in the demand for US dollars and an outward shift in the supply of dollars for sale, therefore the equili rium exchange rate should decrease. p ) )" *
+ , c ,- $ . / # 01+ c /0$1 c / 01. $ , c ' -a)p The increase in US income should reflect an outward shift and therefore increasing the demand for Canadian goods - )p The supply schedule of Canadian dollars for sale should not change -c)p The equili rium exchange rate of the Canadian dollar should rise 2p !* ) )" *
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01+ 3 /0$1 / 01. $ , ' -a)p @iven that there would e relaxed controls on imports, it should cause an increase in the US demand for Japanese yen - )p The supply of yen would therefore decrease -c)p The equili rium value of the yen would then increase, causing and upward pressure %p ) * * & " $# , ( " ' A high interest rate may attract foreign inflows -to invest in securities offering high yields), causing an expectation of high inflation. High inflation can place downward pressure on the local currency, so some foreign investors may e discouraged from investing in securities denominated in that country͛s currency. The REAL INTEREST RATE adjust the nominal interest rate for inflation. This is known as the Fisher Effect. p ,) )" * )" # $ $ $ , & $ # , 4 , ' If the valued opinion -the forecast) of future high interest rates were acted upon, it could have an immediate effect on the dollar. Investors may decide to invest their dollars in foreign securities that are expected not to fluctuate. Consumers might decide to ͞purchase͟ now rather than later ecause the dollar wouldn͛t e as valua le in the future. This would cause supply and demand levels to move. Forecasts may have a larger impact on emerging markets, however. Some forecasts have no impact ecause of the daily changing value moves so quickly, there isn͛t time to respond. Banks and firms that have large purchasing/ orrowing capacities would have a greater impact. Foreign exchange rates are very volatile and a poor forecast could result in huge losses, so investors have hopefully learned not to place as much emphasis on an ͞expert forecast͟. 5p 6 )" & , , ' Either trade or financial flows will affect the exchange rates and the interaction of these two will cause a shift in the value of the currency. All relevant factors must e considered simultaneously to assess the likely movement of the euro or the dollar. Supply and demand are the most determining factors. As demand for the euro rises, so does the value and the demand for the dollar should decrease.
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$ , c 3 ' If interest rates decline in Canada, then US and Japanese investors will increase their flow of capital into Canada, thus increasing the supply of Canadian dollars. If the supply of a lower valued Canadian dollar increases, demand will then decrease over time. The US dollar should experience growth during this time as it invests capital in a market where it is appreciating. The Japanese yen should e the most influenced y the interest rates ecause of Japan͛s assumed heavy capital flow transactions with the Canadians as well as the US. 8p), / +
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" ' Impact on other countries ʹ It seems that other countries would react y continuing to push their goods into the United States to further drive down the value of a dollar and continue to widen the deficit, however, since most countries cannot survive without the uying power of the US, then they most likely will not react as hastily. Impact on the US ʹ I don͛t think announcements such as these have that great of an impact as one might think it should. MNCs can only export what purchases are willing to uy, and the US consumer, given such a weak dollar, demand that goods purchased are priced low, so these imports are a must! MNCs aren͛t going to react with a ͞knee-jerk͟ response ecause it takes huge volumes to impact a deficit and it seems to e a losing attle. $p / "
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,- " 9 See a ove, same answer ʹ in ͞my͟ opinion. Foreign exchange traders can͛t afford to respond to every rift of movement of the deficit. An error in forecasting could cause an even worse outcome if the interaction of trade and financial investments doesn͛t take into consider ALL the factors that can cause a shift in trade alance.