Reference no: EM13106661

Using appropriate graph, explain your answers to following questions.

(a) Yesterday, the current exchange rate was $1.05 U.S. dollar per per Australian dollar and traders expected the exchange rate to remain unchanged for the next month. Today, with new information, traders now expect the exchange rate next month to fall to $US1 per Australian dollar. Explain how the revised expected future exchange rate influences the demand for Australian dollars, or the supply of Australian dollars, or both in the foreign exchange market.  

(b) In 1 January 2010, the exchange rate was 91 yen per U.S. dollar. Over the year, the supply of U.S. dollars increased and by January 2011 the exchange rate fell to 84 yen per U.S. dollar. What happened to the quantity of U.S. dollars that people planned to buy in the foreign exchange market?  

(c) On 1 August 2010, the exchange rate was 84 yen per U.S. dollar. Over the year the demand for U.S. dollars increased and by 1 August 2011 the exchange rate was 100 yen per U.S. dollar. What happened to the quantity of U.S. dollars that people planned to sell in the foreign exchange market?  

The U.K. pound is trading at 1.54 Australian dollars per U.K. pound. There is purchasing power parity at this exchange rate. The interest rate in Australia is 2 per cent a year and the interest rate in the United Kingdom is 4 per cent a year.

(d) Calculate the Australian interest rate differential.  

(e) What is the U.K. pound expected to be worth in terms of Australian dollars one year from now?  

(f)  Which country is more likely to have the lower inflation rate? How can you tell?  .

The table gives some information about the U.S. international transactions in 2008.

(g) Explain and calculate the current account balance.  

(h) Explain and calculate the capital account balance.  

(i) Did U.S. official reserves increase or decrease? Explain  

(j) Was the United States a net borrower or a net lender in this year? Explain your answer.