Question

Explain by using graph how exchange rate determined Use supply and demand diagrams to verify answers. A. Supply decreases and demand is constant B. Demand decreases and supply is constant. C. Supply increases and demand is constant D. Demand increases and supply increases E. Demand increases and supply is constant. F. Supply increases and demand decreases. G. Demand increases and supply decreases H. Demand decreases and supply decreases

Answer 1

Answer to question parts (a) - (d)

Assume a dollar-pound exchange market. - A Supply decreases and demand is constant => price of dollar I H Di Guantity As a result, equilibrium price of dollar in terms of pound increases. For example, initially belone the shift, o 70 pound could buy I dollar. And new after the shift, as equilibrium price of dollar in terms of pound t 0.78 pound new can buy 1 dollar. It means, pound has depriciated in value and dollar has appreciated. quantity of & decreases because ALSO, equilibrium of the shift. By Demand decreases and supply is constant $/ KXD2 Di Quantity , QI Equilibrium price of dollar in terms of pound t. imeans dollar has depriciated and pound has cated in value. Equilibrium quantity of has also decreased. appreciated dollar has in vale also

demand is contant el Supply increases and $/ EN DI - Quantity Equilibrium quantity of & exchanged t and equilibrium price of & in terms of £ V. That means; & has. depriciated in value. Edy Demand increases and supply increases > I scenario 1 shift in Shift im Peinand supply scenario 2 l shift in shift in Demand supply - scenario 3 shift im Shift in Demand Supply si SIEN N Equilibrium price of Equilibrium price Equilibrium price of & in terms of £ p. of $ bemains 1$ & means $ & Appreciates. unchanged and depreciates and Equilibrium quantity equilibrium quantity the of $ exchanged a equilibrium quantity flequilibrium quantity - Equilibrium quantity of $ exchanged increases and value of $ can appreciate, de priciate or pemain unchanged based on the magnitude at Shifts