Foreign Exchange Rate

Foreign Exchange Rate

Ee

Where:

Ee represents equilibrium demand and supply of euro.

Ye represents equilibrium demand and supply of Yen.

E represents equilibrium demand and supply

D represents a demand for foreign exchange

S represents supply for foreign exchange.

The equilibrium of foreign exchange occurs where the supply and demand for Euro and Yen are equal. An example of supply will be exports of commodities in Euros to Japan, while an example of demand will be imports of products from Japan in Yens.

Answer 1B

• Inflation has an impact on increasing the prices of commodities. For example, country A is South Africa exporting gold, and Country B is Switzerland importing gold. Inflation in South Africa will cause an increase in gold prices, resulting in a decline in demand for commodities from Switzerland. The reduction in demand results in a decrease in quantity demanded a commodity.
• Switzerland will demand more rand (South Africa money) to import gold; this will increase the demand for foreign currency. The equilibrium exchange rate will increase for both supply and demand.
• The nominal exchange rate will be used, not the real exchange rate. Inflation had only an impact of affecting the nominal exchange rate. The real exchange rate has been adjusted to reflect the inflation changes.

Answer 2

€e

1. The perception by Eurozone property investors that property prices in the UK will lead to higher demand for sterling; this will affect increasing the value of Euros. The demand curve will shift upward from D0 to D1. The euro will increase from €e to €2, and sterling value will increase from £e to £2.
2. The decision of British households to purchase fewer agricultural products from the Eurozone will have an impact on reducing the euro value. The demand curve will shift to downward from D0 to D1. The value of euro will decline from €e to €1, and sterling value will decrease from £e to £1.
3. The decision of foreign banks in London to shift their operation to the Eurozone will impact the increasing value of the euro. The demand curve will shift upward from D0 to D1. The euro will increase from €e to €2, and sterling value will increase from £e to £2.

Answer 3

a)

2. b) Current interest rate = 2.5%

Total investment = 5*2000000 =$10,000,000

Interest rate amount = 2.5% *10,000,000 =250,000

Number of lines = (10,000,000 – 250,000)/2,000,000 = 4.875 lines

c.)  Interest rate amount = 3.75% *10,000,000 =375,000

Number of lines = (10,000,000 – 375,000)/2,000,000 = 4.8125 lines

d). The interest rate should fall to zero to enable the firm to invest in all the lines.

Answer 4A

Autonomous expenditure refers to the expenditure that is independent of national income. The expenditure has to be regarded regardless of the level of the national income. In contrast, the induced is the expenditure that varies with the level of national income. For example, induced expenditure will be high if the level of national income is high.

Answer 4B

Y = 3,400 + 0.6Y

Y – 0.6Y = 3,400

0.4Y = 3,400 = 8,500

Answer 4C

Answer 5

1. Fiscal policies are measures taken by the government that have an impact on the economy. The government will take expansionary measures to increase the level of aggregate demand. Expansionary measures will be to increase the level of government expenditure and the reduction of taxes. This will impact the increase in money supply and increase aggregate consumption and investment, increasing real GDP (Cavallo 28).
2. Monetary policies are measures taken by the central bank that impact the money supply in the economy (Foresti 237). The central bank will lower the lending interest rate, and it will increase the money supply in the economy. The consumer will be able to increase their level of spending due to increased money supply. This will lead to an increase in aggregate demand and real GDP.

• The recessionary gap occurs during the period when there is inflationary pressure. The government will increase the level of taxes and reduce government spending to reduce the recessionary gap. The central bank will increase the lending interest rates to reduce spending and decrease the recessionary gap (Resende 263). The aggregate demand (AD) from either of the diagram will decrease and shift leftward.

2008. Figure (a) could be used to represent the major economies in the period between 2008 – 2019 and the response of policymakers. During the period, the aggregate demand has been less than expected real GDP. Policymakers have been trying to increase the level of the money supply due to deficit resulting from the financial crisis of 2008. Figure (b) was not selected because it indicates a constant aggregate supply.
2009. In 2019, major economies faced several risks resulting from the financial crisis. Countries have borrowed debts to finance their countries. The financial crisis has also caused high unemployment and low investments.

Work Cited

Cavallo, Antonella, et al. “The Common Framework for National Fiscal Policies and the Euro Area Fiscal Union.” Fiscal Policies in High Debt Euro-Area Countries, 2017, pp. 11–49., doi:10.1007/978-3-319-70269-8_2.

Foresti, Pasquale. “Monetary And Fiscal Policies Interaction In Monetary Unions.” Journal of Economic Surveys, vol. 32, no. 1, 2017, pp. 226–248., doi:10.1111/joes.12194.

Resende, Fernando. “Pricing Strategies for Recessionary Times.” Innovation in Pricing, 2017, pp. 261–265., doi:10.4324/9781315184845-17.