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:
e. The Japanese put quotas and high tariffs on all imports from the United States.
f. Tourism from the Unites States increases sharply because of a fare war among airlines.
e. The Japanese put quotas and high tariffs on all imports from the United States.
1. Direction of the shift:
The supply curve for dollars will shift to the left.
2. Factor causing the change:
The quotas and high tariffs imposed by Japan on imports from the United States will reduce the demand for U.S. goods and services in Japan. As a result, Japanese businesses and individuals will need fewer U.S. dollars to pay for these imports, causing a decrease in the demand for dollars.
3. Resulting movement of the equilibrium exchange rate:
The decrease in demand for dollars will cause the equilibrium exchange rate for the dollar to depreciate in terms of foreign currency. This means that the value of the dollar will decrease relative to the foreign currency.
f. Tourism from the United States increases sharply because of a fare war among airlines.
1. Direction of the shift:
The demand curve for dollars will shift to the right.
2. Factor causing the change:
The sharp increase in tourism from the United States is a result of a fare war among airlines, which leads to lower airfares. This makes traveling to the United States more affordable for foreigners, increasing their demand for U.S. dollars to pay for expenses such as accommodation, food, and entertainment.
3. Resulting movement of the equilibrium exchange rate:
The increase in demand for dollars will cause the equilibrium exchange rate for the dollar to appreciate in terms of foreign currency. This means that the value of the dollar will increase relative to the foreign currency.
e. In the case of Japan putting quotas and high tariffs on all imports from the United States, the situation is related to the demand for dollars.
- Shift in the demand curve for dollars: The demand curve for dollars will decrease.
- Factor causing the change: The quotas and high tariffs imposed by Japan will make it more expensive for Japanese consumers to purchase goods from the United States. This will reduce the demand for U.S. goods and, consequently, the demand for U.S. dollars.
- Resulting movement of the equilibrium exchange rate: The equilibrium exchange rate for the dollar in terms of foreign currency will decrease. Since the demand for dollars has decreased, the value of the dollar will also decrease in relation to foreign currencies.
f. In the case of tourism from the United States increasing sharply due to a fare war among airlines, the situation is related to the demand for foreign currency.
- Shift in the demand curve for dollars: The demand curve for foreign currency will increase.
- Factor causing the change: The fare war among airlines will make it cheaper for U.S. consumers to travel to foreign countries. This will lead to an increase in demand for foreign currency as U.S. tourists need more foreign currency to pay for their expenses.
- Resulting movement of the equilibrium exchange rate: The equilibrium exchange rate for the dollar in terms of foreign currency will increase. Since the demand for foreign currency has increased, the value of the dollar will also increase in relation to foreign currencies.