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?

Solutions

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 1 year ago

Next > < Previous

Related Solutions

Suppose the U.S. dollar-euro exchange rate is 1.1 dollars per euro, and the U.S. dollar-Mexican peso...

Suppose the U.S. dollar-euro exchange rate is 1.1 dollars per euro, and the U.S. dollar-Mexican peso rate is 0.1 dollars per peso. What is the euro-peso rate? ____ euros per Mexican peso. (Enter your response rounded to three decimal places.)

2. Arbitrage and spot exchange rates Suppose you trade dollars and euros for a bank that...

2. Arbitrage and spot exchange rates Suppose you trade dollars and euros for a bank that has branches in Boston and Rome. You can electronically transfer the funds between the two branch locations at no cost, and trading commissions are negligible. The current dollar-per-euro exchange rate in Boston is E$/EURBO=1.5653 , while in Rome, it is E$/EURRO=1.586. You can make a profit for the bank if you buy euros in [Rome / Boston ] and sell them in [Rome / Boston...

Suppose today's exchange rate is $1.480/€. The three-month interest rates on dollars and euros are 4...

Suppose today's exchange rate is $1.480/€. The three-month interest rates on dollars and euros are 4 percent p.a. and 3 percent p.a., respectively. The three-month forward rate is $1.475. A foreign exchange advisory service has predicted that the euro will appreciate to $1.495 within three months. Which strategy using forward contracts would give you the highest profit in the above situation and what will be the annualized return from the strategy? Select one: a. Buy euros forward and sell them...

The euro exchange rate is $1.25/euro

The euro exchange rate is $1.25/euro. The continuously compounded dollar interest rate it 5% and the continuously compounded euro in- terest rate is 4%. Suppose that you borrow euros and lend dollars for 1 year. At what exchange rate will you break even on this position?

Suppose the current exchange rate between Euro and YEN is 0.02.

Suppose the current exchange rate between Euro and YEN is 0.02. The euro-denominated annual continuously compounded risk-free rate is 4% and the yen-dominated annual continuously compounded risk- free rate is 1%. What are the 6-month euro/yen and yen/euro forward prices?

How each of the following changes will affect the exchange rate (dollars per euro) according to...

How each of the following changes will affect the exchange rate (dollars per euro) according to the monetary approach to exchange rates: a.The US money supply increases. b.The EU money supply decreases. c.The US national income increases d.The EU national income decreases.

Draw a Demand and Supply diagram of the foreign exchange market for dollars in equilibrium. Suppose...

Draw a Demand and Supply diagram of the foreign exchange market for dollars in equilibrium. Suppose the Federal Reserve reduces interest rates while interest rates in Europe do not change. Make use of a graph of the foreign exchange market to show how this will affect the value of the dollar.

Which statement below is correct when the exchange rate increases for U.S. dollars per one Euro?...

Which statement below is correct when the exchange rate increases for U.S. dollars per one Euro? The indirect exchange rate for Euros has increased. A company that has a receivable denominated in Euros experienced a loss. The U.S. dollar has experienced a weakening relative to the Euro. Imports from Europe to the U.S. are less expensive.

Suppose the real GDP of an economy is $560 billion dollars andits unemployment rate is...

Suppose the real GDP of an economy is $560 billion dollars and its unemployment rate is 8%.If the natural rate of unemployment is estimated at 5%, what is the value of the country’s potential GDP (LAS) in billions of dollars? Enter your response below rounded to 1 decimal place.

Suppose that the exchange rate (spot price) of Euro in GBP (British Pound) is GBP 0.95. ...

Suppose that the exchange rate (spot price) of Euro in GBP (British Pound) is GBP 0.95. In addition, assume that you can freely borrow and lend in GBP for any maturity at a rate of 2% per annum and that you can do the same in Euro at a rate of 1% per annum. Both rates are continuously compounded rates. Given these assumptions: Compute the forward price (exchange rate) of the GBP in Euro for delivery of the GBP in...

Subjects