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Author Question: What are the three factors that affect the demand for foreign currency? What will be an ideal ... (Read 44 times)

sjones

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on: Jun 30, 2018
What are the three factors that affect the demand for foreign currency?
 
  What will be an ideal response?

Question 2

Describe the chain of events leading to exchange rate determination for the following cases: (a) An increase in U.S. money supply (d) Increase in growth rate of U.S. money supply (c) Increase in world relative demand for U.S.
 
  products (d) Increase in relative U.S. output supply


SVictor

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Reply #1 on: Jun 30, 2018
Answer to Question 1

The three factors that affect the demand for foreign currency are expected return, risk and liquidity.

Answer to Question 2

Chain of events leading to exchange rate determination:
=  (Pus/PE)
Increase in U.S. money supply: Pus rises in proportion to the money supply; q remains the same. All dollar prices will rise (including dollar price of euro).
Increase in growth rate of U.S. money supply: Inflation rate, dollar interest rate, Pus, E, rises in proportion to Pus.
Increase in world relative demand for U.S. products: E falls, and q does as well.
Increase in relative U.S. output supply: Dollar depreciates, lowers relative price of
U.S. output, rise in q, effect on E is not clear since q and Pus work in opposite directions.


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