Macroeconomics

‭The‬ ‭demand‬ ‭for‬ ‭a‬ ‭currency,‬ ‭on‬ ‭the‬ ‭other‬ ‭hand,‬ ‭is‬ ‭affected‬ ‭by‬ ‭those‬ ‭who‬ ‭hold‬ ‭other‬ ‭currencies.‬ ‭For‬ ‭example,‬ ‭the‬ ‭demand‬ ‭for‬ ‭the‬ ‭U.S.‬ ‭dollar‬ ‭is‬ ‭influenced‬ ‭by‬ ‭holders‬‭of‬‭Euros,‬‭Yen,‬‭and‬‭any‬‭other‬‭currency‬ ‭exchanged for the U.S. dollar.‬ ‭Let’s‬ ‭use‬ ‭the‬ ‭following‬ ‭table‬ ‭to‬ ‭examine‬ ‭some‬ ‭changes‬ ‭in‬ ‭the‬ ‭equilibrium‬ ‭of‬ ‭the‬ ‭U.S.‬ ‭dollar‬ ‭foreign‬ ‭exchange market. Point X is the original equilibrium point on the diagram that follows.‬

‭Table 4: Changes in the Foreign Exchange Market Equilibrium‬

‭Change‬

‭Change in Exchange‬ ‭Rate (ER*)‬

‭Change in Equilibrium‬ ‭Quantity (Q‬ ‭$‬ ‭*)‬

‭Example on‬ ‭Graph‬

‭Demand for U.S. dollar ↑‬ ‭(Shifts to the right)‬

‭ER ↑‬ ‭(Appreciates)‬

‭Q‬ ‭$‬ ‭↑‬

‭X → Y‬

‭Demand for U.S. dollar ↓‬ ‭(Shifts to the left)‬

‭ER ↓‬ ‭(Depreciates)‬

‭Q‬ ‭$‬ ‭↓‬

‭X → Z‬

‭Supply of U.S. dollar ↑‬ ‭(Shifts to the right)‬

‭ER ↓‬ ‭(Depreciates)‬

‭Q‬ ‭$‬ ‭↑‬

‭X → W‬

‭Supply of U.S. dollar ↓‬ ‭(Shifts to the left)‬

‭ER ↑‬ ‭(Appreciates)‬

‭Q‬ ‭$‬ ‭↓‬

‭X → R‬

‭224‬

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