Question

Think of the U.S. as the domestic country and Great Britain (GB) as the foreign country. Let “e” stand for the domestic price of one unit of the foreign currency. If e = 1.80, then Group of answer choices none of the other options. $1 would cost approximately £1.80. a guitar in GB listed at £1,800 would cost $1,000. a guitar in the US listed at $2,160 would cost £1,800. $1 would cost approximately £0.56.

Suppose Thailand has seen a downturn in their economy, and US investors (and other countries) start pulling out their investments from Thailand’s financial markets. Suppose this cause a decrease in the dollar price of the Thai currency (the Baht). This could be called a ‘depreciation of the Baht against the dollar. Then, an analyst says that “…because the price of the Baht has fallen, this will cause people to buy more of the Baht, and that will cause the price of the Baht to increase again back toward where it was before the economic downturn.” (It may help you to use our model of exchange rate determination, and substitute the Baht () in place of the Pound (£). Let ‘e’ be the $ price of 1 – currently about $0.03!) .  incorrect because it will increase above where it was before the economic downturn.

correct because there would be a shortage of the Baht in the currency market if this did not happen.

correct because people buying more always causes price to increase.

correct because there would be a surplus of the Baht in the currency market if this did not happen.

incorrect because buyers of the Baht caused the price drop in the first place, and the drop in price will not shift demand for the Baht to the right.

Answer 1

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Question:

Answer:

Incorrect because buyers of the Baht caused the price drop in the first place, and the drop in price will not shift demand for the Baht to the right.

Explanation:

As per the question, Thailand has seen a downturn in their economy, and US investors (and other countries) start pulling out their investments from Thailand’s financial markets. Suppose this cause a decrease in the dollar price of the Thai currency (the Baht). This could be called a ‘depreciation of the Baht against the dollar.

If there is a large net outflow of money from Thailand to the USA or other countries, then it will depreciation in the exchange rate. This is because people will sell Bath in order to buy Dollar/or other's assets. It will increase the bath in the economy or foreign exchange market. The increase in the supply of bath on foreign exchange markets that will depress the value of the Bath (bath will be depreciated) and appreciate the value of the UDS or other currencies. Here, the demand of the Bath will not affected and not shift left or right because people use their saving rather than cash.

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