Question

In: Economics

10. If a country has rising incomes and people are buying more imports, what do you...

10. If a country has rising incomes and people are buying more imports, what do you expect to happen to the value of that country's currency in comparison with other countries in which incomes are not rising as fast? Explain in your answer how you reached this conclusion by considering demand and/or supply of the currency.

11. Given the following information, what is the price elasticity of demand between $10 and $20 if these are the reservation prices people have for this good.

$5 . $5 . $10 $10 . $10 $10 . $15 . $15 . $20 $20

12.

Given the following information for three goods, which two are substitutes and which two are complements. You don't need to calculate the cross price elasticities here but which will be negative and which will be positive. Explain how you reached these conclusions.

Good A B C
Initial price $50 $20 $40
Later price $60 $20 $40
Initial quantity 100 200 100
Later quantity 80 150 110

Solutions

Expert Solution

10. The exchange rate of a country's currency is determined through the intersection of the demand for and the supply of foreign currency, where the foreign exchange rate is the rate at which a country's currency is exchanged with the currencies of the rest of the world.

When the income of the country increases the demand for imports increase and the demand for imports means an increase in the outflow of foreign currencies. When a country's demand for foreign currency increases the foreign exchange rate i.e. the value of foreign currency increases leading to depreciation of the currency of the country.That is when the value of foreign currency appreciates it means the depreciation of the domestic currency.

For the country for whom the income is not increasing the import will not increase significantly so the demand for foreign currencies would be limited.When the demand is stable the exchange rate too does not fluctuate if the supply too remain the same.

So we can say a country's currency depreciates when the demand for foreign currencies increases or the supply of foreign currencies decline and a country's currency appreciates when the supply of foreign currency increases compared to demand.


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