Any assistance you can provide regarding the following question is appreciated:

Question

Any assistance you can provide regarding the following question is appreciated:

China and the UK have open securities markets and active financial sectors. The money supply of the UK is growing more quickly than its economy while China's money supply is growing at the same rate as its economy. The UK has a trade surplus with China. What do each of the three theories of currency value (flow, stock and asset) suggest about the future rate at which China's currency can be exchanged for currency from the UK? Explain briefly.

Explanation / Answer

High trade surplus means UK exports more th

an what they import fro china, so their currency demand is higher and hence their currency will appretiate with respect to china in future.

Both have open securities markets and active financial sectors means all thea msrket information is instantaneously reflected in their currency rates, like if some event happens in china the impact will be immediately seen in both uk snd chinese markets.

Higher money supply means higher inflation,

This means prices are higher than they otherwise would have been In UK than china.so they can invest their money inother growing economies like china for higher returns, so in short run they will sell uk currency and buy chinese yuan , but in long run they will sell chinese yuan and take back pounds.

So uk currency will eventualky appretiate.

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