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Chapter 18: Q. 16 (page 495)

On June 23,2016, voters in the United Kingdom voted to leave the European Union. From June 16 to June 23, 2016, the exchange rate between the British pound and the U.S. dollar increased from 1.41 dollars per pound to 1.48 dollars per pound. What can you say about market expectations regarding the result of the referendum?

Short Answer

Expert verified

The result of the referendum will be that there will be decrease in the interest rate of any future value and alternately it would decline.

And in case of any Bank there would be always an increase in the reserve so that it can lead to higher value in the long run.

Step by step solution

01

Concept Introduction

In case of referendum, the United Kingdom gave a vote in the favor of leaving. The % of vote casted in favor of leaving was 52 % and that of staying was 48 %. An exchange rate is defined as a rate between two different currencies.

02

Explanation

The result of the referendum will be that there will be decrease in the interest rate of any future value and alternately it would decline. And in case of any Bank there would be always an increase in the reserve so that it can lead to higher value in the long run.

This results in the growth of real GDP but is much slower in comparison to the rise of the demand for the import of goods and as a result of which there is shortage in net exports.

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Most popular questions from this chapter

The Mexican peso is trading at 11 pesos per dollar. If the expected U.S. inflation rate is 1% while the expected Mexican inflation rate is 15% over the next year, given PPP, what is the expected exchange rate in one year?

Go to the St. Louis Federal Reserve FRED database, and find data on the daily dollar exchange rates for the euro (DEXUSEU), British pound (DEXUSUK), and Japanese yen (DEXJPUS). Also find data on the daily three-month London Interbank Offer Rate, or LIBOR, for the United States dollar (USD3MTD156N), euro (EUR3MTD156N), British pound (GBP3MTD156N), and Japanese yen (JPY3MTD156N). LIBOR is a measure of interest rates denominated in each country’s respective currency.

a. Calculate the difference between the LIBOR rate in the United States and the LIBOR rates in the three other countries using the data from one year ago and the most recent data available.

b. Based on the changes in interest rate differentials, do you expect the dollar to depreciate or appreciate against the other currencies?

c. Report the percentage change in the exchange rates over the past year. Are the results you predicted in part (b) consistent with the actual exchange rate behavior?

Go to the website that contains the most recent calculations of the Economist’s Big Mac Index, http://www .economist.com/content/big-mac-index.

a. Plot the relationship between the local price of a Big Mac and the actual exchange rate. Does this plot suggest that there is a close relationship between the local price and the actual exchange rate? Does this suggest that the theory of PPP has some validity? Explain why.

b. Does your evidence above indicate that PPP is a good theory for exchange rates in the short run?

c. Which country’s currency is the most overvalued in terms of purchasing power parity? Is it expensive or cheap to shop there?

d. Which country’s currency is the most undervalued in terms of purchasing power parity? Is it expensive or cheap to shop there?

International travelers and business people frequently need to accurately convert from one currency to another. It is often easy to find the rate needed to convert the U.S. dollar into another currency. It can be more difficult to find exchange rates between two non U.S. currencies. Go to http://www.oanda.com/convert/ classic. This site lets you convert from any currency into any other currency. How many Lithuanian litas can you currently buy with one Chilean peso?

Suppose the president of the United States announces a new set of reforms that includes a new anti-inflation program. Assuming the announcement is believed by the public, what will happen to the exchange rate on the U.S. dollar.
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