Question

The following questions focus on the exchange rate between the Malaysian ringgit and the South Korean won. Assume the exchange rate is flexible. The exchange rate is defined as the number of ringgit you must pay for one won Suppose strong economic growth in Malaysia causes Malaysian incomes to increase, while incomes in South Korea remain the same Shift the appropriate curve or curves on the following graph to illustrate how this affects the market for South Korean won if all other things remain equal Supply of Won Demand for Won Supply of Won Demand for Won QUANTITY OF WON

Answer 1

Increase in Malaysian Income will cause an increase in the demand for the Korean goods and thus imports will rise. This will cause an increase in the demand for the Korean Won. The demand curve thus shifts right.

Supply of won 03 Demand for won Q2 Q1 Quantity of WON

Thus the increase in income causes Korean Won to appreciate relative to Malaysian ringgit and causes Malaysian ringgit to depreciate relative Korean Won.

Higher inflation in South Korea implies than Korean goods are now relatively more expensive. This will result in a decline in the demand for Korean goods thus a decline in the demand for Korean Won.

The demand curve for the Korean Won will shift to the left.

Supply of won 03 3 P1 Demand for won Q2 Q1 Quantity of WON

The rise in the real interest rate in Malaysia would imply inflow of funds in Malaysia thus higher demand for Malaysian ringgit.

Thus the supply of won will increase and demand for won will decrease, which will cause Malaysian ringgit to appreciate.