EECS 1710 Lecture Notes - Lecture 1: Foreign Exchange Market, Demand Curve
24 Jun 2018
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EECS 1710 Lecture 1 Notes
Introduction
Increase in Supply Schedule
The banks that serve as intermediaries in the foreign exchange market will not have
enough British pounds to accommodate demand for pounds at the prevailing exchange
rate.
These banks will respond by raising the price (exchange rate) of the pound.
As they raise the exchange rate, there will be a decline in the amount of British pounds
demanded in the foreign exchange market as well as an increase in the amount of
British pounds supplied (sold) in the foreign exchange market.
The banks will increase the exchange rate to the level at which the amount of British
pounds demanded is equal to the amount of British pounds supplied in the foreign
exchange market.
Decrease in Demand Schedule
Now suppose that conditions cause the demand for British pounds to decrease
(depicted graphically as an inward shift in the demand schedule) but that the supply
schedule of British pounds for sale has not changed.
Under these conditions, the amount of pounds demanded in the foreign exchange
market will be less than the amount for sale in the foreign exchange market at the
prevailing price (exchange rate).
The banks that serve as intermediaries in this market will have an excess of British
pounds at the prevailing exchange rate, and they will respond by lowering the price
(exchange rate) of the pound.
As they reduce the exchange rate, there will be an increase in the amount of British
pounds demanded in the foreign exchange market and a decrease in the amount of
British pounds supplied (sold) in that market.
Document Summary
The banks that serve as intermediaries in the foreign exchange market will not have enough british pounds to accommodate demand for pounds at the prevailing exchange rate. The banks will increase the exchange rate to the level at which the amount of british pounds demanded is equal to the amount of british pounds supplied in the foreign exchange market. Now suppose that conditions cause the demand for british pounds to decrease (depicted graphically as an inward shift in the demand schedule) but that the supply schedule of british pounds for sale has not changed. The banks will reduce the exchange rate to the level at which the amount of british pounds demanded is equal to the amount supplied in the foreign exchange market. As intermediaries in the foreign exchange market will not have enough british pounds to accommodate demand for pounds at the prevailing exchange rate. These banks will respond by raising the price (exchange rate) of the pound.
