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Equilibrium Exchange Rates B. How Do Americans Purchase German Goods? 1. Foreign Currency Demand:
-derived from the demand for foreign countrys goods, services, and financial assets. e.g. Americans demand German goods such as Mercedes autos
D
$1.20/ $1.10/ $1.00/
Qty
At higher exchange rates, Americans demand less euros and vice versa.
$1.10/
$1.00/
Qty
At higher exchange rates, Germans supply more euros and vice versa.
D S
$1.10
Qty
D D S
$1.20/
$1.10/
Q1 Q2
Qty
= (e1 - e0)/ e0
where e0 = old currency value
= (e0 - e1)/ e1
where e0 = old currency value e1 = new currency value
2. 3.
Sample Problem
Suppose the U.S. dollar appreciates against the Russian ruble by 500%. How much did the ruble depreciate against the dollar?
Sample Problem
Depreciation of the ruble:
(e0 e1 ) x e1
e1 e0 5 e0 e0
Sample Problem
e e0 1 e0 e0
e 1 1 1 5 1 e0 e 6e0 1
(e0 e1 ) x e1