4. Exchange-rate overshooting The following graph shows the short-run supply schedule (Sp) and demand schedule (Do) for the British pound. Si denotes the long-run supply schedule of pounds. The initial equilibrium exchange rate is $2.40 per pound. Suppose that the demand for pounds decreases to D₁. On the graph, use the tan point (dash symbol) to indicate the short-run equilibrium exchange rate. Then use the grey point (star symbol) to indicate the long-run equilibrium exchange rate. Note: Dashed drop lines will automatically extend to both axes. 40 3.6 2.8 24 2.0 1.6 12 0.8 992 2 2 2 2 3 3 o 0.4 EXCHANGE RATE (Dollars per pound) So D D 10 20 30 40 50 60 70 80 QUANTITY (Pounds) 90 100 Π Short-Run Equilibrium Long-Run Equilibrium The quantity of pounds supplied decreases. The supply schedule of pounds becomes more elastic, as shown by S. The dollar depreciates to $2.00 per pound. Referring exchange Step The dollar appreciates to $1.20 per pound. The British price of U.S, exports increases, and the quantity of U.S. exports demanded decreases. 1. 2. that led to the long-run equilibrium

4. Exchange-rate overshooting The following graph shows the short-run supply schedule (Sp) and demand schedule (Do) for the British pound. Si denotes the long-run supply schedule of pounds. The initial equilibrium exchange rate is $2.40 per pound. Suppose that the demand for pounds decreases to D₁. On the graph, use the tan point (dash symbol) to indicate the short-run equilibrium exchange rate. Then use the grey point (star symbol) to indicate the long-run equilibrium exchange rate. Note: Dashed drop lines will automatically extend to both axes. 40 3.6 2.8 24 2.0 1.6 12 0.8 992 2 2 2 2 3 3 o 0.4 EXCHANGE RATE (Dollars per pound) So D D 10 20 30 40 50 60 70 80 QUANTITY (Pounds) 90 100 Π Short-Run Equilibrium Long-Run Equilibrium The quantity of pounds supplied decreases. The supply schedule of pounds becomes more elastic, as shown by S. The dollar depreciates to $2.00 per pound. Referring exchange Step The dollar appreciates to $1.20 per pound. The British price of U.S, exports increases, and the quantity of U.S. exports demanded decreases. 1. 2. that led to the long-run equilibrium

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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