Assume that the spot exchange rate between the dollar and the Swiss franc is a f

Question

Assume that the spot exchange rate between the dollar and the Swiss franc is a floating, or flexible, rate. Use a supply and demand model to graph the effects of each of the following events in the market for Swiss francs. What happens to the exchange rate? Has the dollar appreciated or depreciated? (5 points each)

a.There is a large increase in Swiss demand for US exports as US culture becomes more popular in Switzerland.

b.There is a large increase in Swiss demand for US investments in US dollardenominated financial assets due to a belief that the US economy will grow quickly.

c. US demand for products imported from Switzerland falls significantly as bad press reports lead Americans

to question the quality of Swiss products.

Explanation / Answer

(a) There is a large increase in Swiss demand for US exports which means that the USD demand will go up. This means that the US dollar will appreciate. The demand graph for the USD will shift to on its right as the demand of USD goes up.

(b) As there is an anticipation that the US economy will grow, this means that the USD will appreciate, With the increase in the value of USD, the graphs shifts to the right.

(c) Due to press, the demand of USD will go down which means that the demand graph of USD will move left as there is a fall in the demand of USD.

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