Question

On a separate sheet graph what will happen in the market for the euro and the market for the dollar in each of the following situations. Be sure to identify the effect on equilibrium quantity and price. More European tourists come to the US for vacations US interest rates fall significantly. The euro increases in international acceptance as a currency of business The US economy outperforms most of the developed world. a. b. c. d.

Answer 1

Ans

1 Demand for Eurose rises as usa tourist has yo spend euros in Europe. Thus price of Euros rises. Supply of dollars rises and thus price of dollars falls but quantity rises

2 less interest rates lead to flight of capital and thus demand for dollars. As a result price and quantity falls

On the other hand now relative interest rate of Europe is higher. Consequently demand for euro rises. Hence price and quantity demanded of euros rises.

3 Demand for euro rises, and hence quantity and price rises. On the other hand demand for dollars falls, and so does quantity and price

4 Demand for dollars rises. Thus quantity and price of dollars rises. On the other hand demand for euros fall. Hence quantity and price of Euros falls