Reference no: EM131733808

Question: Exchange Rate Movements. Are the following statements true or false? Explain why.

a. If the general price index in Great Britain rises faster than that in the United States, we would expect the pound to appreciate relative to the dollar.

b. Suppose you are a German machine tool exporter and you invoice all of your sales in foreign currency. Further suppose that the European monetary authorities begin to undertake an expansionary monetary policy. If it is certain that the easy money policy will result in higher inflation rates in "Euroland" relative to those in other countries, then you should use the forward markets to protect yourself against future losses resulting from the deterioration in the value of the euro.

c. If you could accurately estimate differences in the relative inflation rates of two countries over a long period of time while other market participants were unable to do so, you could successfully speculate in spot currency markets.