Economic Price Changes Consider the FX market for bought and sold for $ as we ha
ID: 1203234 • Letter: E
Question
Economic Price Changes
Consider the FX market for bought and sold for $ as we have done in class. Suppose the US price level rises suddenly while the UK price level remains unchanged. Show how US people will respond to this change, and how UK people will respond. UK demand for US goods/services: rise or fall? UK supply of in the FX market: rise or fall? Supply shift causes $/XR to rise or fall? Supply shift causes to appreciate relative to $ or depreciate? US demand for UK goods/services: rise or fall? US demand for UK : rise or fall? Demand shift causes $/XR to rise or fall? Demand shift causes to appreciate relative to $ or depreciateExplanation / Answer
(a) As the price level in US rises, Goods and services in US becomes costlier. This results decrease in the demand of US goods and services by UK people. Thus there is fall in the demand of US goods and services by the UK
(b) As the demand of US good and services decreases, there is fall in the demand of US dollar decreases. This results more supply of US dollar in the FX market
(c) As the price level in US increases, there is less demand of US goods and services, Supply of foreign exchange of dollar-pound falls.
(d) As there is less demand of US dollar, Pound appreciates relative to dollar. In other words, dollar depreciate relative to pound
(e) As the price level of UK remains unchanged, US demand for UK goods and services rises.
(f) As the demand for UK goods and services rises, the US demands for UK pound increases.
(g) As the price level in US increases, there is less demand of US goods and services, Demand of foreign exchange of dollar-pound rises.
(h) As more UK goods and services are demanded by US results more demand for pounds. This will lead to appreciate the value of pound relative to dollar.
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