#580 Recall that an exchange rate is the price of one

Recall that an exchange rate is the price of one - Economics

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Free Chegg Question

Recall that an exchange rate is the price of one currency in another. For example, it may take the US $1.35 to buy 1 British Pound. Also, recall the interest rates affect exchange rates. What do you predict will happen to the foreign exchange rate if interest rates in the United States increased more than in the UK? (In other words, which currency will become stronger?) How would such a change affect US exports to the UK? Would it be less expensive for an American tourist to take a vacation to London after the interest rate change? Be sure to clearly explain and justify your reasoning.

Ensure you have presented your assignment in a logical format, that has an introduction paragraph, the body (one or more paragraphs), and a concluding paragraph. Also, ensure that you have the appropriate formatting to avoid plagiarism and the appropriate grammar (this may be achieved by using free tools available on the Internet).

The following criteria will be used to grade the papers:

• Realistically and thoroughly explains what might happen to the foreign exchange rate.
• Makes realistic predictions about what might happen to US exports and explains why.
• Realistically predicts what might happen to the price of a London vacation and explains why.
• Organization and style of the essay.

Organization Grading Guidelines: Presentation is very effective and presented in a logical format with a clear beginning, middle and end. There is a clear statement of ideas and smooth transitions. The writer has stated the main idea clearly and has provided relevant details. The main idea is clearly conveyed in a presentation that is highly relevant and interesting. The student provides evidence of thoughtful input. Details are rich and appropriate. Spelling, punctuation, and capitalization are virtually always correct.

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Free Chegg Answer

An increase in interest rates leads to an appreciation in the currency of the home country where interest rates have increased.

If Interest rates in the United States were to increase more than in the UK then more and more people will invest in the US and try to save as they are getting a higher interest rate on their savings, this will increase the demand for US dollar which would lead to appreciation in the US dollar as compared to the pound. For example, previously USD was 1.35 = 1 pound. Now as the USD will appreciate it will be less than 1.35 as compared to 1 pound. One will have to pay less than 1.35 dollars ($1.20, etc) to get 1 pound. Thus USD will become stronger.

US exports to the UK in the short run would stay the same in terms of quantity but the dollar value would reduce as earlier they were selling to the UK for $1.35 per pound, now they are selling at $1.20 per pound. In the long run, exports would reduce as exporters are not getting the same value of money for their goods which they were getting earlier.

Yes, it would be less expensive for an American tourist to take a vacation in London, as earlier he was paying $1.35 per pound, now he is only paying $1.20 per pound.

Thus, in conclusion, an increase in interest rates leads to an appreciation of the currency, exports decline in the long run and people save on foreign travel as the value of their currency improves.