Consider the exchange market for the Swedish krona (abbreviation: SEK) with the
ID: 1225526 • Letter: C
Question
Consider the exchange market for the Swedish krona (abbreviation: SEK) with the U.S. dollar (USD) as shown in the graphs below. For the following situations, determine whether demand and/or supply will change, whether the Swedish krona will appreciate or depreciate, and if the quantity of kronor exchanged will increase or decrease.
a. The central bank of Sweden raises its key interest rates, thereby increasing the yield on Swedish bonds compared to the yield of similar bonds in the United States.
Instructions: Use the tools provided 'D1,SEK' and 'S1,SEK' to plot the endpoints of each line and show the new equilibrium. IMPORTANT!!!!!
YOU DONT HAVE TO DRAW IT JUST LET ME KNOW WHERE BOTH LINES SHIFT BECAUSE I AM CLUELESS
As a result, the krona will a:
(select 1)appreciate increase/ decrease/ or keep the same value depreciate
and the quantity of kronor exchanged will
(selesct 1) decrease/increase/ increase, decrease, or stay the same.
b. The central bank of the United States raises its key interest rates, thereby increasing the yield on U.S. bonds compared to the yield of similar bonds in Sweden.
Instructions: Use the tools provided 'D1,SEK' and 'S1,SEK' to plot the endpoints of each line and show the new equilibrium.
As a result, the krona will
(select 1 )depreciate/ increase, decrease, or keep the same value/ appreciate
and the quantity of kronor exchanged will (select 1)increase/increase, decrease, or stay the same/decrease.
Explanation / Answer
a. Demand of Swedish korna will increase. This causes rightward shift of DSEK.
As a result, the krona will appreciate and the quantity of kronor exchanged will increase.
b. Increase in U.S interest rate increases the supply of Swedish Krona as people invest in US bond. It causes rightward shift of supply curve.
As a result, the krona will depreciate and the quantity of kronor exchanged will decrease.