Skip to main content

Exercise: foreign exchange market

  •  You are given the following demand and supply schedules for the U.S foreign exchange market for Mexican pesos:

  • Identify the equilibrium exchange rate and quantity, and draw the demand and supply curves. Then, what would happen to the value of the pesos if the demand for American goods increases? What should we expect to happen to the U.S current account? Assuming the trade balance is by far the biggest variable and the U.S 's current account was equal to 0 before this sudden increase.
    • The equilibrium must be the point that is shared by both the demand and supply schedules. Thus, one pesos is worth about 0.5 U.S dollars (the exchange rate) and there are 6,250,000 pesos supplied at this point, assuming that one p is worth 10 million pesos.
    • Let's graph the demand and supply curves:

    • If the consumers in Mexico want to consume more American goods, then we should expect the supply curve for pesos to shift to the right. This will cause an appreciation of the dollar and depreciation of the pesos. 

    • Note that from the graph we see that one peso is worth less dollars than before.
    • The current account should be at a surplus, since now more U.S goods are consumed abroad. Though the appreciation of the U.S dollar should slowly decrease the the U.S current account certeris paribus.


Labels:
Location: Boston, MA, USA

Comments

Post a Comment

Popular posts from this blog

Macroeconomics: equilibrium in the AD/AS model

Real output and price level in the AD/AS model: The short run equilibrium in the AD/AS model, is when the  intersection between the short run aggregate supply curve and the aggregate demand curve determines the level of output and price level.          This short equilibrium output can be compared to the full-employment (i.e long run equilibrium) output by adding the long run aggregate supply curve in the graph.  If the difference between the short run equilibrium output and full employment output is negative than we have a recessionary gap. This could be caused by a decrease in households' consumption, a fall in private investments, or a decrease in government spending. If the difference is positive, we have an inflationary gap, where the short run equilibrium output is bigger than its full employment output. This can be caused by an increase in households expenditures, expansionary fiscal policy, etc... If the gap is zero, this means that t...
Post a Comment
Read more

Macroeconomics: balance of payments accounts

Balance of payment is the sum of three separate accounts and must always be equal to 0 (given no statistical error): Current account: the net flow of funds exchanged for goods and services, and monetary gifts  that flow in and out of a country. This is often used as an indicator for net export. Financial account: also known as the capital account, is the net flow of funds for investment in real assets (direct investments) or financial assets (stocks or bonds) into a nation. Official reserves: in order to balance the two accounts above, a country must have a reserve of foreign money. It measures the net effect of all money flows from the other accounts. If the current account is positive, it must be the case that the sum of the financial account and official reserves is negative. Current account (CA) components: Balance of trade in goods: spending by consumers and firms on imported and exported goods. Exported goods have a positive effect on the current account, whereas importe...
Post a Comment
Read more

Macroeconomics: real vs nominal gross domestic product

Nominal GDP:   A nominal GDP measures the value of a nation's output produced in a year, given the prices charged for that year. However, if prices increase while the output level stays constant in a given year, the nominal GDP will drastically increase, even though the level of production is equal to that of the previous year. Estimating real GDP: To determine the actual change in output from one year to the next, we must adjust the nominal value of a country's output in a year based on changes in the average price level during that year.  Inflation is when the price level increases, whereas deflation is when the price level is decreasing. To determine whether the nominal GDP overestimates or underestimates the output of a country, one must know whether the average price level has increased or decreased. In order to achieve this task can use a price index known as the GDP deflator. The GDP deflator: Real GDP is calculated by replacing the prices for that current year with tho...
Post a Comment
Read more