Question

1.Why does the supply curve shift outwards in the exchange floating exchange rate regime and the fixed exchange rate regime
2. Why does the demand curve shift outwards in the exchange floating exchange rate regime and the fixed exchange rate regime

Answer 1

Hi,

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Before answering both the question i want to discuss about fixed exchange rate regime and floating exchane rate gegime.

Fixed Exchange Rate Regime-

A fixed interest rate is an exchange rate that does not flactuate or that change within pre determind rate. In this exchange rate policy government or central bank direct intervenes in the foreign exchange marke to control the exchange rate.

Foating Exchange Rate Regime-

A floating exchange rate is an exchange rate where exchange rate is fixed by the forex market based on demand and supply of the currency. Government or central bank does not intervenes in the forex maket and the market fix the exchange rate itsef by demand and supply of the currency.

Supply Curve Under Floating Exchange Rate Regime-

I am exlpaing it with an example. Suppose there are two countries USA and UK. the currency of USA is Doller($) and the UK is Pound(GBP). Both of the countries are trading partner. Citizen of the USA buy British products and British buy the American products.

When British prefer to buy American products there arises supply of Dollers. So, supply curve shift to outwards in response to an increase in demnd for USA goods.

Supply Curve Under Fixed Exchange Rate Regime-

I am exlpaing it with an example. Suppose there are two countries USA and UK. the currency of USA is Doller($) and the UK is Pound. Both of the countries are trading partner. Citizen of the USA buy British product and British buy the American product.

When British prefer to buy American products. This increse demand for imports cause in increase in the supply of domestic currency( Pound) in the exchange market to optain the USD. So, supply curve shift to outwards in response to an increase in demnd for USA goods.

Demand Curve Under Floating Exchange Rate Regime-

I am exlpaing it with an example. Suppose there are two countries USA and UK. the currency of USA is Doller($) and the UK is Pound. Both of the countries are trading partner. Citizen of the USA buy British product and British buy the American product.

When American prefer to buy British products means in increase in demand for Britsh Pound. So, consiquently demand curve shifts towards.

Demand Curve Under Fixed Exchange Rate Regime-

I am exlpaing it with an example. Suppose there are two countries USA and UK. the currency of USA is Doller($) and the UK is Pound. Both of the countries are trading partner. Citizen of the USA buy British product and British buy the American product.

When American prefer to buy British products then the demand of Doller increase to exchange market to optain the GBP(Pound). So, consiquently demand curve shifts towards.

In fixed Exchange Rate Regime Government control the exchnge rate and reduce the impact of demand and supply.