Question

Situation          USA overcoat              Exchange Rate                        UK overcoat

A                                        $50                              $3 = &1                                    &20

B                                        $50                              $2 = &1                                    &20

C                                        $50                              $2 = &1                                    &30

D                                        $50                              $1 = &1                                    &30

e. Situation C: Inflation in the UK. Now, where will Americans buy their overcoats and where will the British buy their overcoats?

f. Moving from situation C to D, has the $, relative to the &, gone up or down in value? Compared with situation C, will this affect where the Americans and British buy their overcoats? Explain.

g. Might the change in exchange rate shown in situation D be the result of--or reaction to--the inflation that occurred in situation C? Explain.

Answer 1

e. UK is facing inflation,so the  money value of UK diminishes. Now Americans can buy overcoats from UK which is more beneficial as money value of UK is less. British can buy their overcoats from UK itself or any other country other than US. Because buying overcoats from US will be a great loss.

f. The value of $ increases compared to &.

This will surely affect the buying of overcoats. Americans can buy larger quantity of overcoats at the same price that they purchased earlier or they can buy same quantity of overcoats at lower price. And if UK want to purchase from US they need to give a larger amount than they gave earlier. This will cause a loss to UK and benefits US.

g. Yes.Now Americans need to pay only less amount for the same quantity they purchased earlier. That's the reason why the exchange of $decreased to 1from 2.Decrease in exchange means a increase in money value.