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AP Macroeconomics Mkt 5 E a Explain Using Graphs As Appropriate the Determinants of Currency Demand and Supply B Explain Using Graphs As Appropriate Questions

Practise shifting currency demand or supply for trade, income, inflation, interest-rate, policy, and capital-flow changes, then determine the new exchange rate.

Syllabus
Effective Fall 2022
Course
AP Macroeconomics

Exam points

  • shift currency demand or supply on a labelled graph and show the new equilibrium appreciation or depreciation
  • trace stronger foreign demand for exports into greater currency demand and appreciation
  • trace higher domestic income and imports into greater currency supply and depreciation
  • link a higher relative price level or inflation rate to weaker currency demand and depreciation
  • link higher relative real interest rates to capital inflows, currency demand, and appreciation

AP Macroeconomics Mkt 5 E a Explain Using Graphs As Appropriate the Determinants of Currency Demand and Supply B Explain Using Graphs As Appropriate Questions question 1

[Maximum number: 3]

Assume that the economy of Vortania is in long-run equilibrium.

Question (a)

(a)

Vortania and Rhodara are trading partners with flexible exchange rates. The currency of Vortania is the Vortanian crown (VTC), and the currency of Rhodara is the Rhodaran mark (RHM). Assume that Vortania's capital and financial account (CFA) balance is zero. Now assume that Vortania imposes new tariffs on imports from Rhodara. Draw a correctly labeled graph of the foreign exchange market for the Vortanian crown, and show the effect of the tariffs on the SUPPLY of the Vortanian crown and the international value of the Vortanian crown.

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Question (b)

(b)

Assume the central bank of Vortania wants to return the Vortanian crown to its international value before the imposition of the tariffs. Would the central bank buy or sell Vortanian crowns in the foreign exchange market? Explain.

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