Managerial Economics Chapter 11: Foreign Exchange Trade ✓ Solved
Managerial Economics chapter 11 Foreign Exchange Tradeand Bubbles
Reflect on the assigned readings for the week. Identify what you thought was the most important concept(s), method(s), term(s), and/or any other thing that you felt was worthy of your understanding. Also, provide a graduate-level response to each of the following questions: 1. When Great Britain voted to leave the Euro- zone, the pound depreciated 17% against the dollar. It also raised fears that the Eurozone would fall apart. Explain how this fear would affect the euro/dollar exchange rate. [Your initial post should be based upon the assigned reading for the week, so the textbook should be a source listed in your reference section and cited within the body of the text. Other sources are not required but feel free to use them if they aid in your discussion]. [Your initial post should be at least 450+ words and in APA format (including Times New Roman with font size 12 and double spaced). Post the actual body of your paper in the discussion thread then attach a Word version of the paper for APA review]. TextBook: Title: Managerial Economics ISBN: Authors: Froeb Publisher: Cengage Edition: 5TH 18
Sample Paper For Above instruction
The recent decision by Great Britain to exit the Eurozone, commonly known as Brexit, had a significant impact on the foreign exchange markets, illustrating the profound interconnectedness between political events and currency valuation. This event caused the British pound to depreciate by approximately 17% against the US dollar, reflecting investor fears over potential economic and political instability within the UK and the broader Eurozone. Additionally, fears that the Eurozone might disintegrate prompted a reevaluation of euro/dollar exchange rates, which can be understood through the lens of supply and demand, risk perception, and economic fundamentals described in Froeb’s "Managerial Economics" (Froeb, 2018).
The depreciation of the pound following the Brexit vote was driven largely by investor concerns about the UK’s economic outlook, trade relationships, and political stability. As investors anticipated increased uncertainty, demand for the dollar as a safe-haven currency surged, leading to a decline in the pound's value relative to the dollar. In terms of exchange rates, this depreciation means that each pound buys fewer dollars than before, which can affect trade balances, inflation, and investment flows. More broadly, this event exemplifies how market psychology and expectations can influence currency prices, sometimes more immediately than economic fundamentals alone (Froeb, 2018).
Regarding the Eurozone’s fears of disintegration, these concerns could lead to a depreciation of the euro against the dollar as well. If investors believe that the Eurozone might break apart, they may fear that the euro would lose its value or become less stable. This would decrease demand for the euro in foreign exchange markets, causing its value to fall relative to both the dollar and other currencies. The risk premium associated with holding euros would rise as investors demand higher returns for holding a potentially unstable currency. Consequently, the euro/dollar exchange rate would shift in favor of the dollar, further weakening the euro (Froeb, 2018).
Moreover, these fears could cause capital flight from the Eurozone, as investors seek safer assets such as US government bonds or currencies perceived as more stable. Such a shift would increase the supply of euros in the foreign exchange market, putting additional downward pressure on the euro’s value. This chain of reactions underscores the influence of psychological and political risk factors on currency valuation, aligning with the concepts discussed in the textbook regarding exchange rate determination (Froeb, 2018).
In conclusion, the Brexit vote not only caused a significant depreciation of the pound but also heightened fears of Eurozone instability, both of which contributed to shifts in exchange rates. The potential disintegration of the Eurozone increases uncertainty and risk, leading investors to favor the US dollar and other stable currencies. These dynamics exemplify the complex interplay of economic fundamentals, market sentiment, and geopolitical risks in foreign exchange markets, as discussed in "Managerial Economics" (Froeb, 2018). Understanding these relationships is essential for managers and policymakers aiming to navigate the uncertainties inherent in international financial markets.
References
- Froeb, L. M. (2018). Managerial Economics (5th ed.). Cengage.