1) The graph below shows the foreign exchange market between the United States a
ID: 1115896 • Letter: 1
Question
1) The graph below shows the foreign exchange market between the United States and Japan before and after an increase in the demand for Japanese goods by U.S. consumers.
A) If the exchange rate was free-floating prior to the change in demand for Japanese goods, what was its value in yen per dollar?
B) After the change in demand, assuming a free-floating exchange rate, what is the new exchange rate in yen per dollar?
C) If the Japanese central bank wanted to keep the exchange rate fixed at its initial value, how many dollars would it have to buy?
,S 125 100 1,000 1,190 1,100 1,270 Quantity of dollars/periodExplanation / Answer
(A) Before demand changed, equilibrium was defined by intersection of D & S curves. At this point, exchange rate was 125 yens per dollar (Equilibrium quantity of dollar = 1,100).
(B) After demand changed, equilibrium is defined by intersection of D & S' curves. At this point, exchange rate is 100 yens per dollar (Equilibrium quantity of dollar = 1,190).
(C) When exchange rate is 125, quantity of dollars supplied = 1,270 (From S' curve)
Number of dollars to buy = 1,270 - 1,190 = 80
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