Question

Explain how a free and competitive market for the exchange rate between two countries ensures that...

Explain how a free and competitive market for the exchange rate between two countries ensures that the whole macro economy is in equilibrium.

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Answer - The free and fair markets leads to the proper interaction between the demand and supply of foreign exchange without the occurance of any inefficiency.

If due to lower exchange rate , the demand for a currency rises , the demand curve will shift right. This will lead to the rise in the exchange rate and with rise in exchange rate , supply of currency will rise. Hence rise in demand and exchange rate is compensated through autotmatic rise in supply.

In the same way , increased exchange rate will lead to rise in supply of currency. This will lead to lower exchange rate. Now , with low exchange rate , demand will rise and exchange rate will shift up to come to equilibrium again.

Hence this shows that if the markets are free and efficient , they will ensure that the markets in the economy are in equilibrium, whether it is goods market or currency market.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Assume that two countries, Country A and Country B, have an equilibrium exchange rate of 4...
Assume that two countries, Country A and Country B, have an equilibrium exchange rate of 4 "A dollars" = 1 "B dollars". Country B then begins to experience a relatively faster growth of income. Assuming a floating exchange rate, predict what will happen in the foreign exchange market between these two countries currencies - which will appreciate and which will depreciate? If on the other hand Country B wished to keep their exchange rate unchanged (fixed), what might they attempt...
How are exchange rates determined? Among the economic factors that influence exchange rates between two countries...
How are exchange rates determined? Among the economic factors that influence exchange rates between two countries are relative interest rates, relative inflation rates, and relative growth in real GDP. How do each of these factors influence the exchange rate? For example if the United States is growing faster than Canada, what happens to the exchange rate between US and Canadian dollars? If the rate of inflation is higher in the United States than in Canada? Or if Canada increases interest...
In recent years the U.S. dollar has weakened against the Euro in the foreign exchange market....
In recent years the U.S. dollar has weakened against the Euro in the foreign exchange market. a) Explain how this effects trade between the two countries. b) Explain how such a situation can have a positive effect on the U.S. economy.
Two countries decide to engage in specialization and exchange with each other. As a result, we...
Two countries decide to engage in specialization and exchange with each other. As a result, we can expect: a. the production possibilities curve for each country to remain unchanged. b. the production possibilities curve for each country to shift inwards. c. the production possibilities curve to shift outwards for the exporter and inwards for the importer. d. the production possibilities curve for each country to shift outwards Consider a normal good produced in a competitive market with many buyers and...
Describe the relation between inflation differences between countries and depreciation of foreign exchange rate (against the...
Describe the relation between inflation differences between countries and depreciation of foreign exchange rate (against the reference country currency) by referring to Purchasing Power Parity (PPP) ?
Describe the relation between inflation differences between countries and depreciation of foreign exchange rate against the...
Describe the relation between inflation differences between countries and depreciation of foreign exchange rate against the reference country currency by referring to Purchasing Power Parity.Explain briefly)
Consider an open economy operating under fixed exchange rate. using equilibrium condition for the good market,...
Consider an open economy operating under fixed exchange rate. using equilibrium condition for the good market, illustrate in a diagram the short-run effect of an increase in the foreign interest rate on domestic output. Assume that UIP holds and that market participants believe that the exchange rate will stay fixed at its current value in the future. explain why?
1. What is exchange rate risk? 2. Explain how a soft currency restricts foreign direct investment....
1. What is exchange rate risk? 2. Explain how a soft currency restricts foreign direct investment. 3. Explain how it is possible for a country to not have its own currency. 4. What action ensures that interest rate parity holds? 5. What is the difference between a Eurodollar and a Eurocurrency? What interest rate is tied to Eurodollars? 6. Assuming a company is invested in foreign projects, a. What two factors contribute to higher risk for the projects? b. What...
Explain how the coronavirus pandemic is affecting the exchange rate market. Whichcurrencies are appreciating and which...
Explain how the coronavirus pandemic is affecting the exchange rate market. Whichcurrencies are appreciating and which one depreciating? Why?
A monopolistic pharmaceutical company sells a pill in two countries, and resales between the countries are...
A monopolistic pharmaceutical company sells a pill in two countries, and resales between the countries are impossible. The demand curves in the two countries are: P1 = 100− Q1 and P2 = 120−2Q2. The monopolist’s marginal cost is $30. Solve for the equilibrium price in each country. What is the equilibrium price and quantity if the monopolist decides to treat the two markets as one big market and charge a unique price? Compare the profits in these two situations.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT