Question

2. Using a figure describing both the U.S. money market and the foreign exchange market, analyze the effects of an increase in the U.S. money supply on the dollar/euro exchange rate. 3. What are the main factors that determine aggregate money demand? Why does the real money demand curve slope downward?

4. What is the expected dollar rate of return on euro deposits if today's exchange rate is $1.10 per euro, next year's expected exchange rate is $1.165 per euro, the dollar interest rate is 10%, and the euro interest rate is 5%? What is the expected dollar rate of return on dollar deposits? Is the foreign exchange market in equilibrium? If so, how do you know? If not, describe the process by which the market reaches equilibrium.

Answer 1

3 there are three main which affect money demand curve are:-

1) intetest rate - a rise in interest causes a reduction in demand .

2)price level - an increse in price level cauaes a rise in individual demand for money than before in the economy

3) real natinal income - a rise in it will raise the demand for money.

4 Real demand for money is downward sloping because of higher rate of interest causes increases the opportunity cost of holding less money . This downward sloping demand curve indicates that people wants to hold less money for increasing interest rate