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finc 445 Chapter 4 Q _A

# finc 445 Chapter 4 Q _A - Chapter 4 Exchange Rate...

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Chapter 4 Exchange Rate Determination Suggested Homework Questions (updated 10/8/07) 1. Use three graphs below (U.S. Imports from France, U.S. Exports to France, and the euro Market) to explain how the exchange rate between the U.S. dollar and the euro is determined. US Imports from France US Exports to France euro ( ) Market D \$ price € price D \$ per A B C E Quantity of Quantity of Exports Quantity of Imports S D A* B* C* E* P* Include in your explanation a discussion of how the demand for U.S. imports and the demand for U.S. exports relate to the supply and demand for francs. For the two points (A and B) on the demand curve for U.S. Imports, show the corresponding points in the euro market (label them A* and B*). For the two points (C and E) on the demand curve for U.S. Exports, show the corresponding points in the euro market (label them C* and E*). Indicate the equilibrium price in the euro market (label it P*). The demand for euros comes from Americans’ desires to purchase French goods. If the \$/ exchange rate is high, the \$ price of French goods is high, so Americans want to buy only a few French goods, which means they demand only a few euros. The supply of euros comes from the French desire to buy American goods. If the \$/ exchange rate is high, the euro price of American goods is low, so the French want to buy a large amount of American goods which means they want to supply (sell) a large quantity of euros. Explain what will happen if the exchange rate is above the equilibrium price P* (i.e., identify who will be dissatisfied with this situation, why they will be dissatisfied, and what action they are likely to take, and why they will take this action.) If the exchange rate is above the equilibrium price in the euro market, a surplus exists. The French will be dissatisfied because they will not be able to sell all of the euros they want to sell at that exchange rate. The French will begin offering euros for a lower exchange rate because they realize they will be more likely able to sell their euros at the lower price (exchange rate). 2.

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finc 445 Chapter 4 Q _A - Chapter 4 Exchange Rate...

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