For each of the following situations, indicate the direction of the shift in the
ID: 1202837 • Letter: F
Question
For each of the following situations, indicate the direction of the shift in the supply curve or the demand curve for dollars, the factor causing the change, and the resulting movement of the equilibrium exchange rate for the dollar in terms of foreign currency:
a. American-made cars become more popular overseas.
b. The United States experiences a recession, while other nations enjoy economic growth.
c. Inflation rates accelerate in the United States, while inflation rates remain constant in other nations.
d. Real interest rates in the United States rise, while real interest rates abroad remain constant.
e. The Japanese put quotas and high tariffs on all imports from the United States.
f. Tourism from the United States increases sharply because of a fare war among airlines. T
Explanation / Answer
a) This will increase the demand for American-made cars overseas and people will demand more dollar. Demand curve will shift to the right and there will be an increase in the price of dollar, an appreciation against foreign currency.
b) Consumption of foreign goods by domestic consumers fall. Domestic investment falls and interest rate is low. Capital flight occurs which causes depreciation of dollar.
c) Higher inflation in US implies less foreign demand for domestic goods. This implies foreigners will demand less dollars and demand for dollars falls. This again implies a depriciation of dollar.
d) As mentioned, a higher real interest rate implies domestic investment by foreigners so there will be increased demand for dollars. The exchange rate appreciates
e) Tariff imposition again implies less foreign demand for domestic goods. This implies foreigners will demand less dollars and demand for dollars falls, resulting in a depriciation of dollar.
f) A fall in the demand for dollars and consequently a reduction in dollar exchange rate.
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