Suppose the equilibrium exchange rate for dollars to euros is 1.2 $/euro representing 2 billion dollars...

Suppose the equilibrium exchange rate for dollars to euros is 1.2 $/euro representing 2 billion dollars traded, and the German consumers have recently started buying the latest iPads. Explain using graphical analysis what would you expect to happen to the equilibrium quantity and price in the currency market?

Expert Solution

Currently, one euro is trading at 1.2 dollars or you can say that one dollar is trading at 0.833 euros. At the same time in the dollar market, the dollar trading volume is 2 billion.

With the context of the dollar market, if German consumers start buying the latest iPads, they going to need dollars to purchase them from the US. This will increase the demand for dollars in the currency market. Due to this, the dollars will become expensive (dollar will appreciate for German consumers) and overall volume will also increase from 2 billion.

In the above, you can see that due to the increase in the purchase of the Ipads, the demand for dollars in the dollar market has increased from DS1 to DS2. This has led to rightward-shift in the demand curve. As a result of this, the dollar value has increased from the ER1 to ER2 and along with the quantity of dollar being traded has also increased from the Q1 to Q2.

jeff jeffy answered 2 years ago

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