Answer to Question #189785 in Economics for ggg

Question

EPL Co. is a MNC based in United Kingdom. EPL specializes in the production of footballs, which are exported from the United Kingdom to the United States. EPL invoices the exports in US dollar and converts the dollars to UK pounds when they are received. EPL believes that the value of the dollar in pounds is very sensitive to economic conditions in the United Kingdom and United States. EPL is considering the following information: The US inflation rate is likely to remain unchanged, while the UK inflation rate is expected to rise [Assume that UK inflation rate is initially similar to the rate in the United States]; The US interest rates are expected to rise, while the UK interest rates are expected to decline [Assume that UK interest rates are initially similar to the rates in the United States];The US government is expected to eliminates all controls on imports by the UK companies.

Using the information provided, will EPL expect the US dollar to appreciate or depreciate in the future? Explain.

Answer 1

EPL will expect the US dollar to appreciate in the future, because US inflation rate is likely to remain unchanged and interest rates are expected to rise, but UK pound will depreciate as a result of decrease in interest rates and inflation.