Question

The graph below shows demand and supply curves for U.S. dollars in the foreign exchange market.  As you can see, the exchange rate (in terms of foreign currency units per dollar) is initially equal to E₀.

Foreign Exchange Market Exchange rate (foreign currency units per dollar) supply of dollars in the foreign exchange market Eo 0 demand for dollars in the foreign exchange market quantity of dollars in the foreign exchange market

Suppose that next year there’s a huge increase in the number of foreigners – from Europe, China, and everywhere else – who decide to visit the U.S. as tourists.  

• How would this huge increase in tourism in the U.S. affect the exchange rate?  To answer this, draw a new demand or supply curve on the graph, mark the new market equilibrium, and mark the new exchange rate on your graph.  Be sure to mark your answers clearly and completely.  Briefly explain your answer.     

• Would these changes tend to make the dollar stronger (that is, appreciate), or would they make the dollar weaker (depreciate)?  Check one:

othese changes would make the dollar stronger(appreciate)

othese changes would make the dollar weaker (depreciate)

Answer 1

Since, larger number of tourists will be visiting USA therefore the quantity demanded of dollar will increase thus, the demand curve will shift to its right as result the price will increase as well as quantity demanded.

Refer the attached picture below

Price D2 D1 Q1 Q2

From above picture we can see the quantity demanded as well as price also increased due to higher demand for dollsr.

These changes will make dollar expensive. Thus, the value of Dollar will appreciate.

These changes would make the dollar stronger (appreciate).

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