Consider the foreign exchange market. For each of the scenarios below, answer the following questions: (1) Which curve moves? (2) In which direction does it move? (3) What happens to the nominal exchange rate in equilibrium (i.e., does the US Dollar appreciate or depreciate)? (a) Brazil places tariffs on US products, limiting imports from America. (b) The US becomes a much riskier place to invest because of widespread political unrest. (c) Firms in the UK become much more profitable than those in the US.
Consider the foreign exchange market. For each of the scenarios below, answer the
following questions: (1) Which curve moves? (2) In which direction does it move? (3)
What happens to the nominal exchange rate in equilibrium (i.e., does the US Dollar
appreciate or
(a) Brazil places tariffs on US products, limiting imports from America.
(b) The US becomes a much riskier place to invest because of widespread political
unrest.
(c) Firms in the UK become much more profitable than those in the US.
(d) The global economy surges, sparking higher consumption everywhere in the world.
(e) Japan’s central bank cuts interest rates in that country.
(f) Mexico’s firms do a much better job of marketing their products to the United
States.
The price of dollar relative to the currency of other countries is determined in the foreign exchange market due to changes in the supply and demand for dollars. If there is a variable which increase the supply for dollars at the given exchange rate, it results into the rightward shift of the supply for dollars curve. And if there is a variable which increases the demand for dollars at the given exchange rate, it will shift the demand for dollar curve rightward.
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