Question

Assume interest rates increase in Mistyville but not in Silvania. Using a correctly labeled foreign exchange graph for Silvania, show and explain the impact of the change in interest rates on each of the following:

1. the supply of Silvania’s dollar.
2. the international value of Silvania’s dollar.
3. Silvania’s net exports.

Answer 1

It is clear from the statement that the interest rate in Mistyville has been increased, so we it understood that the people in Silvania will have to grab or purchase more amount of Silvania currency inorder to purchace the Mistyville currency.

1) From the above statement its clear that there is increasse in currency flow, hence we can say that supply of Silvanias dollar will increase.

2) The international value of Silvania’s dollar will be less than Mistyvilles since Mistyvilles currency is appreciated. That means depreciation in Silvanias dollar.

3)There will be decrease in Silvanias net exports as its too much expensive to buy products from Mistyville.