Assuming market-determined exchange rates, use supply and demand schedules for pounds to analyze the effect on the exchange rate (dollars per pound) between the U.S. dollar and the U.K. pound under each of the following circumstances: a. Voter polls suggest that the U.K.'s conservative government will be replaced by radicals who pledge to nationalize all foreign-owned assets. b. Both the U.K. and U.S. economies slide into recession, but the U.K. recession is less severe than the U.S. recession. c. The Federal Reserve adopts a tight monetary policy that dramatically increases U.S. interest rates. d. Britain's oil production in the North Sea decreases, and exports to the United States fall. e. The United States unilaterally reduces tariffs on U.K. products. f. Britain encounters severe inflation, while price stability exists in the United States. g. Fears of terrorism reduce U.S. tourism in the United Kingdom. h. The British government invites U.S. firms to invest in British oil fields. i. The rate of productivity growth in Britain decreases sharply. j. An economic boom occurs in the United Kingdom that induces the U.K. consumers to purchase more U.S.-made autos, trucks, and computers. k. Ten percent inflation occurs in both the United Kingdom and the United States.

Step by step solution

01

Voter polls suggest radical government change

Such an announcement usually creates uncertainty leading to decrease in demand for the UK pound as investors would want to avoid risk. This shift in demand decreases, will lead to a depreciation of the UK pound.

02

Both economies slide into recession

Recessions usually make the currency of the affected country less attractive. However, if the recession in UK is less severe than in US, the British pound might appreciate relative to the US dollar.

03

Tight US monetary policy

Adoption of tight monetary policy will likely result in higher US interest rates. This will attract more investors to hold US dollars increasing its demand, hence, the US dollar would appreciate against the UK pound.

04

Decrease in Britain's oil production

A decrease in Britain's oil exports to the US reduces the demand for UK pounds, causing the UK pound to depreciate.

05

US reduces tariffs on UK products

This encourages more imports from the UK hence increasing demand for UK pounds. The UK pound would thus appreciate.

06

Inflation in Britain

Inflation reduces the currency's purchasing power; therefore the UK pound would depreciate against the US dollar.

07

Reduction in US tourism in UK

Fears of terrorism would reduce US demand for UK pounds, hence leading to its depreciation.

08

US investment in British oil fields

US firms would need UK pounds to invest, which will increase its demand, hence, the UK pound would appreciate.

09

Decrease in productivity growth in Britain

This would most likely reduce foreign investment hence reducing demand for UK pounds, leading to a depreciation of the UK pound.

10

Economic boom in the UK

During a boom, consumers purchase more imported goods. Increased imports from the US would drive up the demand for US dollars. Hence, the US dollar would appreciate against the pound.

11

Ten percent inflation in both countries

Since both countries are experiencing the same rate of inflation, there is likely to be no significant change in the exchange rate.

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