3. The diagram below shows the foreign exchange market between Korean Won (W) an

Question

3. The diagram below shows the foreign exchange market between Korean Won (W) and US dollars (S). Dollars per Won (Sw) : 10 15 20 (Billions) a. The price of which currency is shown on the vertical axis? How many Won and how many dollars are in trade in equilsbrium at point A? nd In the diagram, the supply of W rises from S to S. List 2 factors that might cause such a shift. b. If the Bank of Korea (South Korea's central bank) maintains a Bexible exchange rate regime, what would happen to the value of the Won with the increase in supply of Won (appreciate or depreciate)? c. Suppose the Bank of Korea chose to prevesnt this and to fix the exchange rate at its initial level at A Would it have to buy or sell Won as part of its official settlements balance? How many Won would it have to buy or sell? What would be the impact on the Bank of Korea's stock of foreign reserves (rise or fall)?

Explanation / Answer

a) The price of won is shown on the vertical axis. At point A there are 10 Won and 1 dollar.

The supply of Won will increase if there is a decrease in the interest rate in the Korea or Fall in the exports.

b) With increase in the supply of Won the won will depreciate.

c) It will have to buy the Won this will reduce the supply of Won. It will have to buy 5 billion Won. The bank of Korea’s foreign reserve will fall as it will have to supply other country’s currency.

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.