07f101ps9solutions

07f101ps9solutions - Economics 101-Fall 2007 Problem Set 9...

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Economics 101—Fall 2007 Problem Set 9 Solutions 1. To make their profits, speculators must buy the currency when it is low, and sell it when the price of the currency goes up. Thus their actions provide a stabilizing effect on the currency’s exchange rate. “Investors who speculate on international currency values provide a valuable service by assuming the risks of those who do not wish to speculate. Normally, speculators stabilize exchange rates because that is how they make profits.” (p. 383). The graph below shows a high demand for the dollar (D1). Here speculators enter the market by selling dollars, and thus pushing the supply curve to the right and down from S1 to S2. As a result, the price of the dollar goes down. And this graph illustrates a low price of the dollar. Here speculators enter the market by buying dollars, and thus pushing the demand to the right and up (from D1 to D2). The price of the dollar goes up. 2. Speculators were able to influence the baht because Thailand was not freely floating its currency. Originally the Thai central bank promised it would keep the baht exchange rate at a certain level (say, P1 on the graph below). At some point the demand
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07f101ps9solutions - Economics 101-Fall 2007 Problem Set 9...

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