Equilibrium exchange rate, Microeconomics

Assignment Help:

Equilibrium Exchange Rate:

The theory of exchange rate determination explains how demand and supply of foreignexchange interact and jointly determine the equilibrium exchange rate. 

 

1264_Equilibrium Exchange Rate.png

 

As seen earlier, the demand schedule for Indian rupees (or supply schedule of foreigncurrency) arises from the foreign demand for Indian exports. Similarly, the supplyschedule of Indian rupees (or demand schedule for foreign currency) arises from theIndian demand for foreign goods or imports. Together, they determine the equilibriumexchange rate (R*)Suppose there is an exogenous increase in income in the US and therefore an increasein demand for Indian goods.  Correspondingly, the demand schedule for Indian rupeesshifts to D1.  The resultant equilibrium exchange rate (R*1 ) indicatesthat the Rupee has appreciated against the dollar.  

Similarly, if Indian imports increase(relative to the exports) then the supply curve (SRs) shifts to the right resulting in the depreciation of Indian rupee from R2 to (R*1).Thus, in a flexible exchange rate regime, market demand for and supply of a country'scurrency determines the changes in exchange rate.  As the demand and supply schedules for currency are determined by many forces, there would be a tendency for high volatilityof exchange rates in this regime. As there would be no intervention by the CentralBank in determining the exchange rate, the BoP will always be in equilibrium. It meansthat the exchange rate adjusts to make the balances in current and capital accounts sumto zero. 


Related Discussions:- Equilibrium exchange rate

Explain supply vs. quantity supplied, Define and explain the following econ...

Define and explain the following economic terms: Economics, Microeconomics & Macroeconomics Positive vs.  Normative Economics Law of Diminishing Marginal Utility Opport

Perform an economic feasibility study, Question: You are required to pe...

Question: You are required to perform an economic feasibility study for a project involving the setting up of an information system in a company. The table below summarises th

Trade ., Nations trade what they produce in excess of their own consumption...

Nations trade what they produce in excess of their own consumption to:

Ppc , two countries workland and playland have similar population and ident...

two countries workland and playland have similar population and identical production possibilities curves but diffrefences . the procuction possibilities combination are as follows

Supply and demand, 1. State of the art machines at the advanced Yamaha musi...

1. State of the art machines at the advanced Yamaha musical instrument plant tune the exact sound of high caliber musical instruments (vs a certain touch, and perhaps a degree of v

Transactions and propose at least two strategies, a) Examine at least three...

a) Examine at least three (3) possible areas for the industry that could lead to transaction costs, and describe each in detail.   b) Speculate about the behaviour that could

Sample Exams, Hi, My Econ prof gives out a sample exam two days before we t...

Hi, My Econ prof gives out a sample exam two days before we take the real exam. If I were to submit the sample exam to you, how long would it take to get the answers back?

Profits, explain normal profits

explain normal profits

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd