Posted by Rm on .
If a country such as Europe sells their saved dollars as a result in a drop in U.S. sales and purchases, will the demand-supply graph show only the demand for the dollar. I just don't understand what the demand-supply graph suppose to illustrate. Help.
Europe is not a country. It's a continent. The European Union is made up of many independent countries that have agreed to use a joint currency -- the euro.
Draw a demand-supply graph for dollars. Put dollars (Q) in the x-axis, put Euros (P) on the y-axis. Demand for dollars is the willingness of people to purchase Dollars with with Euros. The supply of dollars is the willingness of people to sell their cache of dollars for Euros.
So What if, in your example, Europeans lose confidence in the Dollar and what it can purchase, and want to trade their Dollars for Euros. There will be in Increase in supply of dollars. Shift the supply curve outward. Price for dollars drops.