Question

Discussion Exercises for Test One 1. Consider the four situations depicted below. They show for each situation the prices of an overcoat in the USA and the United Kingdom (UK) as well as the currency exchange rate in each situation. Because our keys do not have the correct symbol for the pound, the British currency, we will use "&" which bears at least a faint resemblance for the actual pound currency symbol. Situation USA overcoat Exchange Rate UK overcoat < $50 $3 = &1 &20 $50 $2 = 81 0 $2-81 $50 $50 $1- &1 a. In situation A. where will Americans choose to buy their overcoats? Where will the British choose to buy their overcoats? Explain. b. Moving from situation A to B has the sgone up in value relative to the & or down in value relative to the &? Explain. c. In situation B. where will American choose to buy their overcoats? Where will the British choose to buy their overcoats? Explain d. In moving from A to B who benefited and who was hurt? Explain. io eto e

Answer 1

Solution

a.The Americans will buy their coats in the US itself.The British will also buy the coats in the US as they cost $50 . In the UK the coat costs 20 pounds i.e., $60 (since the exchange rate is $3 = 1 pound)

b.

Yes the the value of US Dollar has gone in value (i.e., appreciated) relative to the UK Pound since previously $ 3 dollars were required for purchasing 1 US Dollar but now only $2 would be enough.

c.

Exchange rate : $2 = 1 Pound ;

In the US,it costs $50 as above.

For Americans it is $50 but if they buy it in UK it will cost 20 Ponds i.e., $40 at the above exchange rate.So they will buy it in the UK.

The British will also buy the coats in the UK itself as it is costing less for them also.

d.Moving From A to B,the British benefited and the Americans hurt.

1.Because all Americans cannot go to UK and purchase the overcoats there eventhough they are comparatively cheaply available there.

2.Even if say they go an purchase in the UK,they have to convert their dollars to pounds which means demand for UK pound increases in relative to the US Dollar which means the UK Pound appreciates going forward.

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