Question

For each of the following: draw a supply/demand graph for the currency market in question. Label axes, the supply and demand curves, and equilibrium exchange rate. Then show and explain with words what will happen to the market after the shock described. Include the effect on the foreign exchange rate. Explain.

A. the market for Russian Rubles - foreigners significantly increase their tourism/ travel into Russia.

B. the market for Japanese Yen - Japanese imports from the United States increase significantly.

C. the market for European Euros - the EU lowers its interest rate.

D. the market for Mexican Pesos - investors speculate that the Peso will soon appreciate.

E. the market for British Pounds - Brexit scares investors, so investors leave the UK.

F. the market for Korean won - Americans buy many more Korean cars.

Answer 1

a. Increase in tourism to Russia will increase the demand for Russian Rubles. Thus, demand curve shifts rightwards leading to appreciation of Russian Rubles in foreign exchange market.

b. As Japanese imports from the United States increases significantly then supply of Yen increases to convert it into dollar for payment of imports and this rightward shift of the supply curve leads to depreciation of Yen in foreign exchange market.

c. As the interest rate is lowered, the return on investment will fall and thus demand for Euros will fall shifting the demand curve leftwards leading to depreciation of Euros in the foreign exchange market.

d. This will increase demand for Pesos and thus lead to appreciation of Mexican Pesos.