Question

Draw the demand and supply curves and provide brief explanations about the exchanger rate and the value of the domestic currency in each case. Note: you just need to state whether the dollar has appreciated or depreciated and whether the exchange rates (R) goes up or down) (after drawing the graphs).

14. The Federal Reserve raised the interest rate fearing inflationary pressures due to the booming U.S. economy.

15.       Both the Japanese and the U.K. economies went into a recession.

Answer 1

14. With the increase in the interest rates, the demand for dollars will increase as the higher rates will attract the new investors. The increase in demand causes a rightward shift in the demand curve causing the exchange rate to go up and thus the dollar will appreciate.

15. With the recession, the exports to the UK & Japanese economies will fall due to lower demand. The lower demand for imports means a lower demand for the dollars, thus a leftward shift which will make the exchange rate to go down and the dollar will depreciate.