In March 2007, the pound reached a record high against the dollar. This made it an excellent time for UK tourists to visit the USA with prices appearing relatively low thanks to the exchange rate. These exchange rate values also affected the balance of payments of both the USA and the UK and the article below looks at the economic impact of the high exchange rate against the dollar.
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|Explain the principal reasons for the change that has taken place in the exchange rate in recent years.
|“On a PPP basis, a pound should buy $1.60”. Explain what is meant by this statement.
|“My bet is that within a year the rate will be closer to $1.60 than $2. Maybe a lot closer.” Assess the impact of this possible outcome on economic growth and inflation in the UK.
|Examine the likely impact of the high exchange rate on the balance of payments situation of (a) the USA and (b) the UK.