• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Q3.34 Part 3 exchange rate dilemma

D

dextar

Member
Is there any problem with the answer.
It says Q3-Q2. It should be Q3-Q1 right? as we are comparing equilibrium rate of $1.5 /pound to $2/pound 1.

Also in general can anyone recommend any alternate text on exchange rate. The course note chapter 16, I'm simply not able to assimilate. Too confusing.
 
I think you are referring to X3.34, part (iii). If the exchange rate is fixed at $2=£1, you can see from the diagram that the demand for £ would be only Q2 but the supply of £ would be Q3, so there is excess supply of Q3-Q2. To keep the £ at $2=£1, the central bank must demand Q3-Q2 of £, ie buy the excess. (If the central bank does nothing, market forces would reduce the value of the £ to the equilibrium value of $1.50=£1.)

All textbooks will have a section on the exchange rate. A floating exchange rate is determined by the demand for and the supply of the currency. If the demand increases (eg because of an increase in demand for exports) the currency will rise; if the supply increases (eg because of an increase in demand for imports) the currency will fall.
 
Back
Top