Suppose $1.69 ¼ £1 in New York and $1.71 ¼ £1 in London. How can foreign-exchange arbitragers profit… 1 answer below »

1. Suppose $1.69 ¼ £1 in New York and $1.71 ¼ £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.

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

Supply and Demand of British Pounds Quantity of Pounds

Supplied

Dollars per Pounds

Quantity of Pound Demanded

50

$2.50

10

40

2.00

20

30

1.50

30

20

1.00

40

10

0.50

50

(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.