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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

From 2009 to 2011, the economies of Australia and Switzerland suffered relatively mild effects from the global financial crisis. At the same time, many countries in the euro area were hit hard by high unemployment and burdened with unsustainably high government debts. How should this have affected the euro/Swiss franc and euro/Australian dollar exchange rates?

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?

When the U.S. dollar depreciates, what happens to exports and imports in the United States?

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?

The New Zealand dollar to U.S. dollar exchange rate is 1.38, and the British pound to U.S. dollar exchange rate is 0.65. If you find that the British pound to New Zealand dollar is trading at 0.5, what would be the riskless profit per U.S. dollar invested?
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