1.

What do you predict will happen to the foreign exchange rate if interest rates in the

United States increase more than in the UK? (In other words, which currency will

become stronger?)

Financial markets have an impact on macroeconomic indicators. The foreign

exchange market is one of the financial markets that have an impact on macroeconomic

factors. The foreign exchange market is a market where various countries' currencies are

exchanged for one another. The currency market is crucial to the economy because it affects

exports and imports, which impact aggregate demand, which is measured by real GDP and

price level. The exchange rate of a nation's currency is the price of its currency for two

purposes: to buy products or services in that country, or to buy assets such as money, capital,

stocks, bonds, or real estate in that country.

The value of a currency increases when interest rates are high. As a result, if interest

rates in the US rise faster than in the UK, the US dollar would strengthen against the British

currency, attracting international investors to invest in the US economy has increased

demand for the dollar, causing the currency to appreciate. ( Rittenberg. L. & Tregarthen. T.

2012).

2. Because the deal will not pay off and will not be beneficial for the UK, the strengthening

of the dollar will cause an increase in the price of US products and services, perhaps

leading to a drop in exports. Due to the weakening of the pound against the dollar, British

manufacturers will receive less for the same amount of money or will have to pay more

for the same product or service they previously purchased, making the deal unprofitable

for UK manufacturers and possibly resulting in reduced imports from the US.
 Furthermore, the strengthening of the dollar, as well as increases in the pricing of

products and services, will result in a drop in UK earnings, rendering the agreement

unattractive. ( Rittenberg. L. & Tregarthen. T. 2012).

The strengthening of the dollar may result in an increase in imports of products

and services by US producers, who will seek out cheaper overseas markets where their

money would purchase more than in the US.

Finally, when the currency increases, imports become less expensive, benefiting

both importers and consumers. A customer can afford to fly more internationally and at

lower rates. Exporters, on the other hand, suffer when the dollar appreciates since they

receive a lesser return for each unit they export. The stronger currency damages

American firms who would rather buy cheaper goods from other countries. Government

policy determines interest rates, which has a wide range of repercussions for consumers,

businesses, and the global economy. ( Rittenberg. L. & Tregarthen. T. 2012).

References

Rittenberg, L. and Tregarthen, T. (2012). Macroeconomics Principles V. 2.0. Licensed under

CreativeCommons by-nc-sa 3.0 (https://creativecommons.org/licenses/by-nc-sa/3.0/)

Written assignment unit 4 - bus 1104 - macroeconomics - uopeople. StuDocu. (n.d.). Retrieved
February 18, 2022, from https://www.studocu.com/en-us/document/university-of-the-
people/macroeconomics/written-assignment-unit-4/9212238