Practise building a foreign-exchange market, connecting international transactions to currency demand or supply, and explaining equilibrium and rate adjustment.
Exchange rates and interest rates are important for macroeconomic decision making.
Draw a correctly labeled graph of the foreign exchange market for the euro, and show the effect of the change in the real interest rate in Japan from part (a)(i) on each of the following.
Supply of euros. Explain.
(b) 3 points:
•
One point is earned for drawing a correctly labeled graph of the foreign exchange market for the euro.
•
One point is earned for showing that the supply curve for euros shifts to the right and for
concluding that the yen price of the euro decreases.
•
One point is earned for explaining that the European purchases of Japanese financial assets will
increase due to the relatively higher rate of return in Japan.
Under a flexible exchange-rate system, the exchange rate between two countries' currencies is determined by the
amount of gold reserves held by the central bank in each country
gross domestic product of the exporting country
demand for and supply of each country's cur rency
amount of resources available to the importing country
real interest rate in the exporting country
C
The United States and the United Kingdom are trad ing partners with flexible exchange rates. The cur rency of the United States is the dollar ($), and the currency of the United Kingdom is the pound (£). The graph provided shows the foreign exchange market for the pound. At an exchange rate of $2 per pound, which of the following will occur?
There will be excess supply of the dollar.
There will be excess demand for the pound.
The pound will appreciate.
The dollar will appreciate.
A £2 souvenir in Britain will cost $1 for United States tourists.
D