Exhibit 11.1

Assume the following: (1) the interest rate on six-month treasury bills is 8 percent per annum in the United Kingdom and 4 percent per annum in the United States; (2) today's spot price of the pound is $1.50, while the six-month forward price of the pound is $1.485.

-Refer to Figure 12.2.If the rate of inflation in the United States is higher than the rate of inflation in Switzerland, then the demand for francs decreases, the supply of francs increases, and the dollar's exchange value appreciates.

Question

Exhibit 11.1

Assume the following: (1) the interest rate on six-month treasury bills is 8 percent per annum in the United Kingdom and 4 percent per annum in the United States; (2) today's spot price of the pound is $1.50, while the six-month forward price of the pound is $1.485.

-Refer to Figure 12.2.If the rate of inflation in the United States is higher than the rate of inflation in Switzerland, then the demand for francs decreases, the supply of francs increases, and the dollar's exchange value appreciates.

Quizplus · Accepted Answer

If the rate of inflation in the United States is higher than the rate of inflation in Switzerland, then the demand for francs would actually increase due to the expectation that Swiss goods will become relatively cheaper. This would lead to a decrease in the supply of francs and an appreciation of the franc's exchange value, not the dollar's.

Exhibit 11.1 Assume the Following: (1) the Interest Rate on Six-Month Treasury