Purchase Solution

Fixed and Floating Exchange Rate System

Not what you're looking for?

Ask Custom Question

a) Assume countries U and Q are trading partners, and that there are no other countries in the world. The following functions represent the demand and supply functions for the currency of country U.

Supply of country U's currency :E = 1.3 - 0.1Qd
Demand of country U's currency :E = -1.1 + 0.2Qs

Where E = exchange rate = country W's currency/country U's currency

(i) Briefly explain how the demand and supply for the currency of country U arise.
(ii) Determine the exchange rate that would prevail under a clean float. Explain how equilibrium would be restored if the current exchange rate were above, or below the equilibrium rate.

b) A country has a current account surplus of £ 6 billion, but a capital account deficit of £ 4 billion.
(i) Is the exchange rate system fixed or floating?
(ii) Is its balance of payments in deficit or surplus?
(iii) Are its foreign exchange reserves failing or rising?
(iv) Is the central bank buying or selling the domestic currency?

Purchase this Solution

Solution Summary

This solution outlines the steps to finding the exchange rate using demand and supply of the currency.

Solution Preview

a) We have,

Supply of country U's currency: E = 1.3 - 0.1Qd
Demand for country U's currency: E = -1.1 + 0.2Qs

(i) Demand for country U's currency arise when the country supplies Qs number of goods to country Q. When U supply Qs quantifies then to buy these quantities of goods country W needs Country U's currency and due to this the demand for country U's currency arise.

Similarly, supply of country U arise when the country demand ...

Solution provided by:
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
Recent Feedback
  • "I've posted a similar question for another course. It's post 657940, and it's a practice problem that I'd like to use for the final exam. Your help will be greatly appreciated. "
  • "thank you!"
  • "Thank you again Jayant. You are super fast. "
  • "Thank you Jayant. You are appreciated. "
  • "Again, thank you Jayant. You are wonderful. "
Purchase this Solution


Free BrainMass Quizzes
Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.