EECS 1710 Lecture Notes - Lecture 2: Foreign Exchange Market, Demand Curve
24 Jun 2018
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EECS 1710 Lecture 2 Notes
Introduction
Decrease in Supply Schedule
The demand of British firms, consumers, or government agencies for U.S. dollars can
change at any time.
Assume that conditions cause that British demand for U.S. dollars to increase.
Then there is an increase in the amount of British pounds to be supplied (exchanged for
dollars) in the foreign exchange market (depicted graphically as an outward shift in the
supply schedule) even though the demand schedule for British pounds has not changed.
In this case, the amount of the currency supplied in the foreign exchange market will
exceed the amount of British pounds demanded in that market at the prevailing price
(exchange rate), resulting in a surplus of British pounds.
The banks that serve as intermediaries in the foreign exchange market will respond by
reducing the price 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.
The banks will reduce the exchange rate to the level at which the amount of British
pounds demanded is equal to the amount of British pounds supplied (sold) in the
foreign exchange market.
Now assume that conditions cause British firms, consumers, and government agencies
to need fewer U.S. dollars.
Hence there is a decrease in the supply of British pounds to be exchanged for dollars in
the foreign exchange market (depicted graphically as an inward shift in the supply
schedule), although the demand schedule for British pounds has not changed.
In this case, the amount of pounds supplied will be less than the amount demanded in
the foreign exchange market at the prevailing price (exchange rate), resulting in a
shortage of British pounds.
Document Summary
The demand of british firms, consumers, or government agencies for u. s. dollars can change at any time. In this case, the amount of pounds supplied will be less than the amount demanded in the foreign exchange market at the prevailing price (exchange rate), resulting in a shortage of british pounds. Banks that serve as intermediaries in the foreign exchange market will respond by increasing the price (exchange rate) of the pound. British firms, consumers, or government agencies for u. s. dollars can change at any time. Assume that conditions cause that british demand for u. s. dollars to increase. In this case, the amount of the currency supplied in the foreign exchange market will exceed the amount of british pounds demanded in that market at the prevailing price (exchange rate), resulting in a surplus of british pounds. The banks that serve as intermediaries in the foreign exchange market will respond by reducing the price of the pound.
