Question

Sketch a graph that demonstrates the demand and supply for the South Korean won against the...

Sketch a graph that demonstrates the demand and supply for the South Korean won against the US dollar. *Label the initial equilibrium exchange rate and quantity of won.

*On the graph, clearly, demonstrate (shift the correct curve(s)) what happens to the exchange rate when strong growth is expected by firms in South Korea. *Explain why you have drawn the change as you have.

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Answer #1

When South Korea expects strong growth, its aggregate demand rises faster than aggregate supply, so import demand increases. As a result, South Korea's demand for US dollar rises (to be able to ay for higher imports from US) and South Korea's demand of Won falls. The demand curve for Won shifts leftward, decreasing exchange rate and quantity of Won.

In following graph, exchange rate (e) and quantity of Won (Q) are measured vertically and horizontally respectively. D0 and S0 are initial demand & supply curves for Won, intersecting at point A with initial exchange rate e0 & quantity of Won Q0. As demand for Won falls, D0 shifts left to D1, intersecting S0 at point B with lower exchange rate e1 (i.e. Won depreciates) and lower quantity of Won Q1.

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