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Question -
1. Suppose $1.69 = £1 in New York and $1.71 = £1 in London. How can foreign-exchange arbitragers profit from these exchange rates? Explain how foreign-exchange arbitrage results in the same dollar/pound exchange rate in New York and London.
2. Table shows supply and demand schedules for the British pound. Assume that exchange rates are flexible.
Supply and Demand of British Pounds
Quantity of Pounds Supplied
Dollars per Pound
Quantity of Pounds Demanded
50
$2.50
10
40
2.00
20
30
1.50
1.00
.50
a. The equilibrium exchange rate equals __. At this exchange rate, how many pounds will be purchased, and at what cost in terms of dollars?
b. Suppose the exchange rate is $2 per pound. At this exchange rate, there is an excess (supply/demand) of pounds. This imbalance causes (an increase/a decrease) in the dollar price of the pound, which leads to (a/an) __ in the quantity of pounds supplied and (a/an) __in the quantity of pounds demanded.
c. Suppose the exchange rate is $1 per pound. At this exchange rate, there is an excess (supply/demand) for pounds. This imbalance causes (an increase/ a decrease) in the price of the pound, which leads to (a/an) in the quantity of pounds supplied and (a/an) __in the quantity of pounds demanded.
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