Consider the foreign exchange market between Japanese yen and U.S. dollar under
ID: 1185590 • Letter: C
Question
Consider the foreign exchange market between Japanese yen and U.S. dollar under the floating exchange rate system. Suppose that interest rates increase in Japan. Use the demand-supply diagram of foreign exchange market to show what would happen to the value of the U.S. dollar. State whether the US dollar appreciates or depreciates relative to the yen. Note: Use a diagram with quantity of dollars on the x-axis and the price of dollars (in terms of yen on the y-axis) To get full credits, please clearly label all graphs and explain why each curve shifts (if any).Explanation / Answer
Use demand and supply to explain how equilibrium price and quantity are determined in a market. Understand the concepts of surpluses and shortages and the pressures on price they generate. Explain the impact of a change in demand or supply on equilibrium price and quantity. Explain how the circular flow model provides an overview of demand and supply in product and factor markets and how the model suggests ways in which these markets are linked. In this section we combine the demand and supply curves we have just studied into a new model. The model of demand and supply uses demand and supply curves to explain the determination of price and quantity in a market. The Determination of Price and Quantity The logic of the model of demand and supply is simple. The demand curve shows the quantities of a particular good or service that buyers will be willing and able to purchase at each price during a specified period. The supply curve shows the quantities that sellers will offer for sale at each price during that same period. By putting the two curves together, we should be able to find a price at which the quantity buyers are willing and able to purchase equals the quantity sellers will offer for sale. Figure 3.14,