A. (5 points) The president of the United States announces that he will increase

Question

A. (5 points) The president of the United States announces that he will increase inflation with his new pro-inflation program. If the public believes him, predict what will happen, holding everything else constant, to the exchange rate for the U.S. dollar (relative to other currencies) in the short run. e ehnge rate for the US. B (5 points) The current exchange rate is 0.93 euros per dollar, but experts believe the dollar will decline to 0.85 euros per dollar. What will be the percentage change in euro's value if experts are right? Will it appreciate or depreciate? C (5 points) An investor in England purchased a 91-day T-bill for $987.65 with a face value of $1,000. At that time, the exchange rate was $1.75 per pound. At maturity, the exchange rate was $1.83 per pound. What was the investor's holding period return in pounds?

Explanation / Answer

answering only the first question as these are separate independent questions.

a) The expectation of an increases in inflation in the future, increases inflation in the immediacy as well. Since the inflation on the US dollar is going to increase, the US dollar declines relative to other currencies in the short run.

b) Since dollar is depreciating, euro will appreciate. The appreciation in Euro is :

Current USDEUR = 0.93

=>EURUSD = 1.0753

Future USDEUR = 0.85

=> Future EURUSD = 1.1765

% increase = 1.1765/1.0753 = 9.4%

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