Posted by Joe on .
I have the first 4 parts but fall short on the last 2 answers:
For each of the following situations, indicate the direction of the shift in the supply curve or the demand curve for dollars, the factor causing the change, and the resulting movement of the equilibrium exchange rate for the dollar in terms of foreign currency:
a. American-made cars become more popular overseas.
A rightward shift in the demand for dollars curve would occur caused by an increase in demand for American made automobiles. The equilibrium exchange rate for dollars would increase.
b. The United States experiences a recession, while other nations enjoy economic growth.
A leftward shift in the demand for dollars curve would occur caused by a lack of interest in US exports. This shift would cause a decrease in the equilibrium exchange rate for dollars.
c. Inflation rates accelerate in the United States, while inflation rates remain constant in other nations.
A rightward shift in the supply of dollars curve would occur because American exports cost more. The equilibrium would also decrease.
d. Real interest rates in the United States rise, while real interest rates abroad remain constant.
A rightward shift in the demand for dollars curve would occur because there would be an increased foreign purchase of American stocks and bonds. The equilibrium exchange rate for dollars would increase. Supply cure for dollars shifts leftward because Americans are investing more in American securities. This also causes the equilibrium exchange rate to increase.
e. The Japanese put quotas and high tariffs on all imports from the United States.
f. Tourism from the United States increases sharply because of a fare war between airlines.
ok, last two. f first as it is the easiest. Befora a U.S. citizen travels overseas, he will first obtain some foreign currency. That is, he will exchange dollars for euros or dollars for pounds. Dollars and euros are substitute goods. So, an increase in tourism by US citizens Increases the demand for Euros/Pounds/Yen/etc and Decreases the demand for dollars.
Now e. Japan buys U.S. goods with dollars. With a quota, they will no longer buy as much American so, the demand for dollars by Japanese will decline, both short run and long run. However, Japanese banks and business will hold Dollars in reserve so that they can make American purchases. With a quota on U.S. goods, their need to hold dollars will immediately fall. So very likely, they will exchange their dollars for Yen, or their dollars for euros/pounds. That is, IN THE SHORT RUN, there would be an increase in the supply of dollars in the dollars market.