Impact of Economy on Exchange Rates The country of Vezot has massive capital flows with the United States because it has no restrictions on the movement of investment funds into or out of the country. Its inflation rate just increased substantially, while the U.S. inflation rate remains unchanged. Vezot’s interest rate just increased substantially, while the U.S. interest rate remains unchanged. Vezot’s income level recently increased substantially, which will increase consumption of products within its country; the U.S. income level remains unchanged. Negligible international trade occurs between Vezot and the United States, and Vezot can easily obtain all of its imported products from border countries instead of the United States. Starting today, the United States has imposed very large taxes on U.S. companies that import products from Vezot. Vezot does not impose restrictions on imports from the United States. Vezot’s currency is freely floating. Based on this information, do you think Vezot’s currency will appreciate, depreciate, or remain unchanged against the dollar? Briefly explain.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 4, Problem 33QA
Textbook Problem

Impact of Economy on Exchange Rates The country of Vezot has massive capital flows with the United States because it has no restrictions on the movement of investment funds into or out of the country. Its inflation rate just increased substantially, while the U.S. inflation rate remains unchanged. Vezot’s interest rate just increased substantially, while the U.S. interest rate remains unchanged. Vezot’s income level recently increased substantially, which will increase consumption of products within its country; the U.S. income level remains unchanged. Negligible international trade occurs between Vezot and the United States, and Vezot can easily obtain all of its imported products from border countries instead of the United States. Starting today, the United States has imposed very large taxes on U.S. companies that import products from Vezot. Vezot does not impose restrictions on imports from the United States. Vezot’s currency is freely floating. Based on this information, do you think Vezot’s currency will appreciate, depreciate, or remain unchanged against the dollar? Briefly explain.

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