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Ranger Supply Company

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Submitted By farahreduan
Words 2132
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Question 1 (12 marks)

i. Assume the spot rate of the British pound is USD1.73/£1.00. The expected spot rate one year from now is assumed to be USD1.66/£1.00. What percentage depreciation does this reflect? (2 marks)

Answers: [pic]

ii. Assume that the US inflation rate becomes high relative to Canadian inflation. Other things being equal, how should this affect the;

(a) US demand for Canadian dollars

(b) Supply of Canadian dollars for sale

(c) Equilibrium value of the Canadian dollar (2 marks)

Answers: a) US demand for Canadian dollars should increase, as some US consumers would want to buy more Canadian products. b) Supply of Canadian dollars for sale should decrease because of the reduced in desire for Canada to buy US goods. c) Equilibrium value of the Canadian dollar should increase as increase in demand and decrease in supply of the Canadian dollar will put an upward pressure on the new equilibrium value.

iii. Assume US interest rates fall relative to British interest rates. Other things being equal, how should this affect the;

(a) US demand for British pounds

(b) Supply of pounds for sale

(c) Equilibrium value of the pound (2 marks)

Answers:

a) US demand for British pounds should increase as the British rate is more attractive for the US investors, and there is less desire for US bank deposits.

b) Supply of pounds for sale should decrease, as the US investors would establish more bank deposits in Britain to take advantage on the attractive British rates.

c) Equilibrium value of the pound should increase as increase and demand and decrease in supply of the pound will put and upward pressure on the new equilibrium value.

iv. Assume that the US

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