Turkish Lira and Ppp

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International Financial Markets Assignment:

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Submitted By : Navneet Makharia |

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Integrative Problem I - The International Financial Markets and Environment

Q1. Explain how the international trade flows should initially adjust in response to the changes in inflation (holding exchange rates constant). Explain how the international capital flows should adjust in response to the changes in interest rates (holding exchange rates constant).

Answer:

In International trade flow countries import and export of goods and services with other countries across the border in order to do foreign currency transactions for its inflow and outflow. Inflation means increases in prices of goods and services in a country over a particular period of time. Increase in prices of goods and services results in reduction in the quantity of goods a one unit of currency can buy. Exchange rates between two currencies derive the worth of that currency. When exchange rates are constant but inflation rises international trade flows also increase.

The prices of US exports would increase compared to British prices, causing a decline in British demand for US exports. The US demand for British goods would increase if US prices increase due to consumers using cheaper priced goods.

When someone imports a good or service, the buyer gives the seller money, just as in domestic transactions. Interest rates are the rates of exchanging one currency for another and the returns from borrowing in one currency.

Q.2 Using the information provided, will Mesa expect the pound to appreciate or depreciate in the future? Explain.

Answer:

The pound’s value will change in response to changes in the capital and trade flows. The information on interest rates suggests that capital flows from the U.S. to the U.K. will decrease, because British interest rates are expected to decline, while flows from the U.K. to the U.S. will increase because U.S. interest rates are expected to rise. It will...