Analyze the currency for Hong Kong Dollars The currency exchange market is one that follows the...

Analyze the currency for Hong Kong Dollars

The currency
exchange market is one that follows the laws of supply and demand and the exchange rate is the price.
Analyze the price change in terms of the forces of supply and demand.

Solutions

Expert Solution

a) When there is an increase in demand of its currency, its currency appreciates and as a result exchange rate increases. The effect is shown in the diagram below. Due to increase in demand , demand curve shifts to the right and both quantity and exchange rate increases.

b) Similarly, when there is decrease in demand of its currency, demand curve shifts to the left. As a result, both quantity demanded and exchange rate falls as shown in the diagram below.

c) Now, if there is an increase in supply of its currency, supply curve shifts to the right. There is higher supply of currency than required. As a result, quantity demanded for currency increases but exchange rate falls. The effect is shown in the diagram below.

d) Similarly, with decrease in currency supply, supply curve shifts to the left. This results in increase in exchange rate along with decrease in quantity demanded. The effect is shown in the diagram below.

Rahul Sunny answered 1 year ago

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