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

Population information, What population information is needed by local auth...

What population information is needed by local authorities to provide the right number of primary and secondary school places? How would such information affect the plans of the lo

Rational producer, would a rational producer be concerned with the average ...

would a rational producer be concerned with the average or marginal product of an input in deciding whether or not to hire the inputs?

Home work, #question. what is the underlying reason for the law of increas...

#question. what is the underlying reason for the law of increasing opportunity cost?

Explain and illustrate the economy adjustment in medium run, 1- Suppose the...

1- Suppose the economy is currently in recession, and the exchange rate if fixed using the IS-LM model. a) explain and illustrate the economy adjustment ( in the medium run)

Determinants of social demand for education - equity, Determinants of Socia...

Determinants of Social Demand for Education - Equity Perfect equality is not observed in any society. Hierarchy in status, standards of living, capacities for effective demand

Effects of price changes, Question 1: Tourism is often seen as a way of...

Question 1: Tourism is often seen as a way of generating income, particularly foreign exchange. The economic spin-off effects are viewed as the most important aspect of touris

Production, for the total product curve why is it when you reach at maximum...

for the total product curve why is it when you reach at maximum adding more input leads to decline in output?

Detenninants of foreignstrategy towards fdi, Instructions to Students 1...

Instructions to Students 1. Answer all the questions, using economic models where appropriate. Begin a question on a new page. 2. Please attach a copy of the assignment cove

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