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Question: 13 use the money market and fx market to answer...

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13. Use the money market and FX market to answer the following question about the relationship between the British pound (£) and the U.S. dollar (S). The exchange rate is in U.S. dollars per British pound, Esjs. Assume the United States temporarily expands its money supply, how does the exchange rate change in the short-run and in the long-run? (a) The exchange rate decreases (the dollar appreciates) in the short-run and remains (b) The exchange rate decreases (the dollar appreciates) in the short-run and goes back (c) The exchange rate increases (the dollar depreciates) in the short-run and goes back (d) The exchange rate increases (the dollar depreciates) in the short-run and remain at that level in the long-run to its initial level in the long-run to its initial level in the long-run at that level in the long-run 14. Given that the exchange rate between two currencies differs in two locations, investors will buy low where the price is lower and sell in the market that has the higher price This process is known as currencies to and it will quickly cause the exchange rate between two in both locations (a) arbitrage; converge (b) triangular arbitrage; converge (c) arbitrage; diverge (d) triangular arbitrage; diverge

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