Foreign Exchange (FOREX) (cont.)

Transcription

1 Foreign Exchange (FOREX) The U.S. sells cars to Mexico. Mexico buys tractors from Canada. Japan buys fireworks from Mexico. This is the foreign exchange market, or FOREX (the global market for the trading of currencies). For all these transactions, there are different national currencies, and each country must be paid in their own currency. The buyer (importer) must exchange their currency for that of the seller (exporter). Changes is preferences/tastes, relative incomes between countries, relative price levels between countries, and changes in relative interest rates all can in pact foreign exchange. Page 1

2 Foreign Exchange (FOREX) (cont.) A higher dollar exchange rate (stronger value/purchasing power of U.S. currency compared to another country's currency) brought about by a higher interest rate would tend to make goods imported into the U.S. more attractive because it makes foreign goods cheaper with the stronger U.S. dollar. If the Federal reserve (monetary policy) buys bonds from banks and thus interest rates rise while other countries' central banks maintain or even lower their interest rates, th1en the return on savings is more attractive in the U.S. than in other countries. Given this higher rate in the U.S., international capital (money) will flow from other countries into the U.S. to earn higher interest rates, resulting in the dollar's appreciation (increase in value) and an increase in aggregate demand (AD). A loss of funds from a country, like when interest rates go down, depreciates (decreases) a country's currency value and decreases AD. Page 2

3 Foreign Exchange (FOREX) (cont.) In a country, a higher exchange rate (either fixed or flexible/floating, the value of one currency for the purpose of conversion to another) will increase the quantity demanded (Qd) of imported goods. This is because in the country where there are higher exchange rates, their money is valued more. The people in that country will buy less of their own country's goods and will then buy more imports. The higher the exchange rate, the better the bargain for the buyer. A fixed or pegged rate is a country's exchange rate fixed completely by its own country. A country fixes its exchange rate by keeping a large supply of their money by buying other currencies. A flexible or floating rate is an exchange rate between countries that changes depending on the supply (S) and demand (D) in the international community. Some governments attempt to depreciate their country's currency in order to promote exports. Page 3

4 Foreign Exchange (FOREX) (cont.) In the foreign exchange market we only look at two countries/currencies at a time and examine the price of one currency relative to that of the other currency. For example, dollars to euros in early Feb., 2017: $1.08 == 1. What happens if you need more dollars to buy one euro? The price for the euro appreciates (the increase in value of a country's currency with respect to a foreign currency), like from $1.08 == 1 to $2 == 1? The U.S. dollar depreciates (the loss in value of a country's currency with respect to a foreign currency) relative to the euro. More dollars are then needed to buy the other currency. The dollar is said to be "weaker," and the American price level (PL) will decrease. What happens if you need fewer dollars to buy one euro (the price for a euro decreases) from $1.08 == 1 to $1.06 == 1 (today's exchange rate.). The U.S. dollar appreciates relative to the euro. Fewer units of dollars are needed to buy a single unit of the other currency. The dollar is then said to be "stronger," and the American price level will. increase. Page 4

5 Foreign Exchange (FOREX) (cont.) If the GDP for a country is strong, the exchange rate of its currency will tend to rise. Its price level (PL) will increase, the chance of inflation will increase, and the chance of recession will decrease. If GDP for a country is weak, the exchange rate of its currency will tend to decline. Its price level will decrease, the chance of inflation will decrease, and the chance of recession will increase. In addition, a higher exchange rate makes U.S. exports less attractive because it makes American goods more expensive for foreigners to buy. A higher exchange rate means more imports and fewer exports while a lower exchange rate means less imports and more exports. Page 5

6 Foreign Exchange (FOREX) (cont.) When thinking about FOREX and which country's currency is appreciating and which is depreciating, think of the currency that is wanted or demanded more relative to the other. For example, if America's currency is desired by foreigners either 1) the inflation in America is decreasing relative to another country (making it cheaper to buy American goods because America's price level is decreasing) or 2) America's interest rate is increasing relative to another country (making it more profitable for foreigners to put their money in American banks because of the higher rate of return from their investment. Page 6

7 For~n Exchange (FOREX) (cont.) hat happens if Europeans prefer vacationing in the United States? er Dollars er Euros s Page 59 D ER= exchange rate Quantity of Dollars Traded Quantit r of Euros Traded he Do lar APPRECJ~ ES The Euro DEPRECIATES

8 Foreign Exchange (FOREX) (cont.) What will happen to the value of the Mexican Peso if either high inflation or low interest rates in Mexico decrease how much of it people want? er er Page 60 Foreign exchange market for the Peso ER= exchan ge rate Pesos he e o D P The demand for Pesos will decrease since Mexico's trading partners will not want to 1 purchase higher priced Mexican products or lose money investing in Mexico. The supply of Pesos will increase as : Mexicans look to buy 1 : Q Quantity of Pesos Traded lower priced imports.

9 Foreign Exchange (FOREX) (cont.) Reasons for a change in FOREX (foreign exchange): 1. Changes in tastes- British tourists flock to the U.S... a. the demand for U.S. dollars increases (shifts right) b. the supply of British pounds increases (shifts right) c. the dollar appreciates and the pound depreciates er Dollars er Pounds Page 61 D ER= exchange rate Quantity of Dollars Traded Quantity of Pounds Traded - - The Dollar APPRECIATES The Pound DEPRECIATES

10 Foreign Exchange (FOREX) (cont.) Reasons for a change in FOREX (foreign exchange): 2. Changes in relative incomes- U.S. growth increases U.S. incomes resulting in more imports... a. the U.S. buys more British imports b. the demand for pounds increases (shifts right) c. the supply of U.S. dollars increases (shifts right) d. the pound appreciates and the dollar depreciates er Pounds er Dollars Page 62 D Quantity of Pounds Traded Quantity of Dollars Traded The Pound APPRECIATES The Dollar DEPRECIATES

11 Foreign Exchange (FOREX) (cont.) Reasons for a change in FOREX (foreign exchange): 3. Changes in relative price level- U.S. prices increase relative to Britain resulting in more imports... a. the U.S. demand for cheaper imports increases b. the U.S. demand for the pound increases (shifts right) c. the supply of U.S. dollars increases (shifts right) d. the pound appreciates and the dollar depreciates er Pounds er Dollars Page 63 D Quantity of Pounds Traded Quantity of Dollars Traded The Pound APPRECIATES The Dollar DEPRECIATES

12 Foreign Exchange (FOREX) (cont.) Reasons for a change in FOREX: 4. Changes in relative interest rates- Ex: U.S. has a higher interest rate than Britain... a. British people want to put money in U.S. banks b. capital flow (money) increases from other countries to the U.S. (shifts right) c. British demand for U.S. dollars increases (shifts right) d. British supply of pounds increase (shifts right) e. the dollar appreciates and the pound d~preciates er Dollars er Pounds Page 64 Quantity of Dollars Traded Quantity of Pounds Traded The Dollar APPRECIATES The Pound DEPRECIATES

13 Macroeconomics Do-Now Please do this: 1. What happens when a country's currency appreciates? 2. What happens when a country's currency depreciates? 3. Imagine U.S. incomes increase resulting in more imports from Britain into the U.S. Draw two graphs, one showing the impact on America's currency and one on Britain's currency. You don't need to use any numbers. Page 13

14 Macroeconomics Do-Now 1. * fewer dollars needed to buy another country's currency * the U.S. dollar appreciates relative to the other currency * the dollar is then ''stronger'' * the American price level will increase 2. * more dollars needed to buy another country's currency * the U.S. dollar deppreciates relative to the other currency which appreciates * the dollar is then ''weaker'' * the American price level will decrease Page 14

15 Macroeconomics Do-Now 4. er Pounds er Dollars D Quantity of Pounds Traded The Pound APPRECIATES Quantity of Dollars Traded The Dollar DEPRECIATES Page 67

16 Page 16 Macroeconomics Do-Now As ume that the Unit ed State economy is operating at full employment. (a) Using a conectly labeled graph of the long-n1n aggregate supply, short-nm aggregate upply and aggregate demand, show each of the following. (i) Curent price level, labeled PL 1 (ii) Current output level labeled Y 1 (b) Assume that personal savings in the United States increase. Create a graph showing the impact on the real interest rate. No numbers are needed. (c) Ba ed on the real interest rate change identifi ed in prui (b), (i) will jnterest-sensitive expenditur e increase decrea e or remain unchanged? (ii) what will happen to the rate of econornjc growth? Explain. ( d) Assume that the real interest rate of the euro zone increases relative to the real interest rate of the Unit ed States. Draw a correctly labeled graph of the foreign exchange market for the euro and how the impact of the change in the real interest rate in the euro zone on each of the f oljowing. (i) Demand for the euro. Explain. (ii) VaJue of the euro relative to the Unit ed State dollar

17 Macroeconomics Do-Now..J ' w > t.j ~ w {J -g: LRAS RAS REAL GDP (a) 2 points: One point is earned for drawing a correctly labeled grapht showing ADJ SRAS; and PL 1. One point is earned for drawing a vertical I.RAS curve at Y 1 that is at the intersection of AD and SRAS. Page 17

18 Macroeconomics Do-Now (b) 2 points: One point is earned for drawing a correctly labeled graph. One point is earned for shifting the supply curve to the right and showing a decrease in real int.brest rate. Real interest rate D Sl S2 Personal savings Page 18

19 Macroeconomics Do-Now {b) 2 points: One point is earned for drawing a correctly labeled graph of the loanable funds market. One point is.earned for shifting the supply curve to the right and showing a decrease in real int:erest rate. (c) 2 point.s : One point is earned for stating that interest-sensitive expenditures wil increase. One point is earned for stating that the economic growth rate will increase because higher investment will increase capital formation. Page 19

20 s or Macroeconomics Do-Now ~ or Dollar to Euro ~ t.tl -~..J...J 8 QUANTITY OF EURO (d) 3 points : One point is earned for drawing a correctly labeled graph of the foreign exchange market for the euro. One point is earned for shifting the demand curve. to the right and showing an increase in the value of the euro. One point is earned for explaining that the demand for the euro increases because the higher real interest rate in the euro zone leads to higher returns for financial investments in the euro Page 20

21 Foreign Exchange (FOREX) (cont.) For each of the following examples, identify what will happen to the value of U.S. Dollars vs. Japanese Yen. 1. American tourists increase visits to Japan U.S. $ depreciates and Yen appreciates Americans spend more in Japan 2. The U.S. government decreases personal income tax U.S. $ depreciates and Yen appreciates The American mone y supply increases which leads to a higher dollar value and increased imports from Japan 3. Inflation in Japan rises faster than in the U.S. U.S. $ appreciates and Yen depreciates Japan will invest capital (money) in America and buy A1nerican goods because of the higher cost of Japant. 4. Japan has a budget deficit and increased interest rates U.S. $ depreciates and Yen appreciates Americans will invest capital (money) in Japan because of the higher interest rate in order to earn more mon1..., Scenarios 1, 2, and 4 will increase U.S. exports because U.S. products are now relatively ''cheaper'' Page 21

22 Foreign Exchange (FOREX) (cont.) For each of the following examples, identify what will happen to the value of U.S. Dollars and Japanese Yen. 5. Japan places high tariffs (taxes) on all U.S. imports U.S. $ depreciates ( demand decreases) and Yen appreciates (supply decreases) American goods increase in price to pay for the Japanese tariff and more Japanese goods are purchased 6. The U.S. suffers a larger recession than Japan U.S. $ appreciates (supply decreases) and Yen depreciates ( demand decreases) Japan will invest capital (money) in America because of their lower price level due to the recession 7. The U.S. Federal Reserve sells bonds at high interest rates. U.S. $ appreciates and Yen depreciates Japan will invest capital (money) in Alnerica because of the higher interest rate in order to earn more interest Page 22

23 Foreign Exchange (FOREX)-Questions 10. An appr cia tion of the Unit ed tates dohar on th e foreign exc hange mark et co uld be ca u ed by a decr,ea e in which f the following? (A) Unit ed State int re t rate (B) Th e Unit ed Stale con um er price ind ex (C) D emand for the do1lar by United tate re ident (D) Export from the United State (E) Th e tariff on good imported int o th United, If Mexicans incr ease their investment in the United States, the supply of Mexican pesos to the foreign exchange market and the dollar price of the peso will most likely change in which of the following ways? S.upply of Pesos (A) Increase (B) Increase ( C) Decrease (D) Decrease (E) Decrease Dollar Price of Peso Increase Decrease lncrease Decrease Not change Page 23

24 Foreign Exchange (FOREX)-Questions 10. An appreciation of the United States douar on the foreign exchange market could be cau ed by a decrea e in which of the following? (A) United State intere t rate The United State con umer price index (C) Demand for the dollar by Unit d State re ident (D) Export from the United State (E) The tariff on good imported into the United 22. If Mexicans increase their investment in the United States, the supply of Mexican pesos to the foreign exchange market and the dollar price of the peso will most likely change in which of the following ways? Supply of P.esos (A) Increase. : Increase ( C) Decrease (D) Decrease (E) Decrease Dollar Price of Peso Increase no foreigners would want U.S. currency with lower interest rates, their money would earn less a decrease of this would cause ::~epreciation of the $ if the supply of the Peso increases then the worth of each will decrease Decrease :::=~~ Increase supply of the Pesos would increase Decrease because the dollar was wanted more Not change Page 77

25 Foreign Exchange (FOREX)-Questions 37. The exchange rate i 1.2 euro per United State do llar. If a restaurant 1neal co L 30 euro in Pari France, what i its dollar co t to a UnHed State tourist? (A) $2.50 (B) $3.60 (C) $25 (D $30 (E) $ Whi ch of the follow ing is true if exc hange rate are freely floa ting? (A) Th e free tnar ket force of demand and upply de termin e the equilibriurn exc hange rates. (B) Th e demand curve for the cu1te ncy i upwa rd slopin g. (C) O nly nomin al va lue of c un~ency ca n be detertnin ed. (D) Th e market determin e the equilibrium value of th curre ncy, but gove rnments buy and ell currency at a fixed rate. (E) Gove rnm ents are unable to affect the international value of their currency. Page 25

26 Foreign Exchange (FOREX)-Questions 37. The exchange rate i 1.2 euros per United State dollar. If a re taurant 1neal co t 30 euro in Pari France, what i its dollar cost to a United State tourist? (A) $2.50 (B) $3.60 $25 (D) $30 (E) $36 if: 1.2 euros = $1 then: 30 euros = $ Which of the following i true if exchange rate are freely floating?. ) The free rnarket force of demand and upply detennin e the equilibriutn exchange rates. this would be the case if the rate (B) The demand curve for the cu1tency is upward +- was flexible or fixed sloping. (C) Only nominal value of currency can be deterrni ned. (D) The rnarket determines the equilibrium value :... of the currency but governments buy and nope sell cun ncy at a fixed rate. (E) Governrnent are unable to affect the international value of their currency. Page 79

27 Foreign Exchange (FOREX)-Questions 55. If country X impo e a tariff on it i1nports how will the supp1y of it currency and H exchange rate be affected in foreign exchange market? Supply (A) lncrea e (B) lncrea e (C) No change (D) Decrease (E) Decrea e Currency Depreciate Appreciate Appreciate Depreciate Appreciate 29. When Country X central bank engages in monetary policy actions that lead to a decrease in interest rates, the international va1ue of Country X's cun ency and Country X s exports and import wi 11 1no t Ukely change in which of the following ways? Value of the Currency Exports In1ports (A) lncrea e lncrea e lncrea e (B) Increase Increa e Decrease (C) Increase Decrea e Decrea e (D) Decrease Increase Decrease (E Decrease Increa e Increase Page 27

28 Foreign Exchange (FOREX)-Questions 55. If country X impo e a tariff on its i1nport, how will the supply of its currency and it exchange rate be affected in foreign exchange markets? Supply Cun ency (A) Increase Depreciate (B) lncrea e Appreciate (C) No change Appreciate (D) Decrease Depreciate Decrea e Appreciate 29. When Country X' central bank engages in monetary policy actions that lead to a decrease in interest rates the international value of Country X's cun ency and Country X's exports and import wil1 1nost likely change in which of the following ways? Value of the Currency Exports Imports (A) Increa e Increa e Increa e (B) Increase Increa e Decrea e (C) Increase Decrease Decrea e (. Decrease Increase De,crease (E) Decrease Increase Increase supply of the currency would decrease because country X's people would want more of their own money because foreign goods would be more expensive because of the tariff the value would decrease because foreigners wouldn't want to invest with lower interest rates, expports would increase because country X's prices would decrease, and imports would decrease because country X can't afford to import more goods because their money is less valuable Page 81

29 Foreign Exchange (FOREX)-Questions 58. An incr a e in Canada real intere,t rate felative to real int re t rat s in th re t of th world will lead to \ hich of the following in Canada? (A An increa e in ex pott (B A d crea e in impot1 (C A reduc d governm nt budget deficit (D) Financial capita l infl w (E D, pr cia tio n of the Canadian dollar 15. Th e main ben fit of free trad e betw en two countrie i that (A income di tribution in ach country \vill becom m ore eq uit able (B empl oy n1ent in ach countr y will in crea e (C migrahon from on country to th o ther will 1ncrea e (D each country can con um beyond it c n trainl of r ourc and productivity (E eac h co untr y will become mor elf-suffi ci nt Page 29

30 Foreign Exchange (FOREX)-Questions 5 8. An incr ea e in Canada rea l int ere t rate relative to r al int re t rat in th re t of th world will lead to which of th following in Canada? because the questions deals with big interest rates, the question is (A An increase in ex port dealing with investing money in (B Ad crea e in imp ort another country, not goods (C A red uc d gover nm nt budget defic it.-a deficit isn't relevant one way or another < Financial ca pit al infl ow (E D pr ciatio n of th Canadian do11ar.. _ nope, Canada's more would be wanted more = appreciation 15. Th main be n fit of fr e trad e betw en two co untri e i that a deficit isn't relevant one way or another (A inco me di tributi on in eac h co untr y will become more equitable none of these are (B empl oyment in ach co unt ry w ill in crea e., guaranteed to happen and (C migration from one co untry to th o ther w ill are not directly related to. < 1ncrea e free trade eac h co untr y ca n co n um e beyond its co nstrain t of re o urce and produ ctivity (E eac h co untr y will become more elf- uffi ci nt Page 83

31 Foreign Exchange (FOREX)-Questions 59. If the value of the United State dollar increase on the foreign exchange n1arket which of the following is rnost likely to occur in the short run? (A) Aggregate demand will decrease. (B) Aggregate demand will increa e. (C) Aggregate supply wi li decrease. (D) Both aggregate demand and aggregate supply wi 11 decrease. (E) Both aggregate de1nand and aggregate supply wi11 increase Suppose that,c ountry A i experiencing high inflation relative to Country B, which is enjoying teady growth with a stable price level. Which of the following would occur in the foreign exchange rnarket? (A) An increase in the demand for Country A's CUITency (B) An increase in the upply of Country B's cu1tency (C) A decrease in the upply of Country A' currency (D) A decrease in the demand for Country B's cuffency (E) A depreciation of Country A' cun ency Page 31

32 Foreign Exchange (FOREX)-Questions 59. If the value of the United States dollar increases on the fore ign exchange marke t, which of the following is mo t lik ely to occ ur in the hort run? this question deals with importing/exprting goods, and since the Aggregate demand wi11 decrease. U.S. $ is appreciating, total demand in the (B) Aggregate demand wi11 increa e. (C) Aggregate suppl y wi1l decrease. (D) Both aggrega te demand and aggrega te suppl y > wi11 decrea e. (E) Bot_h ~ggregate de1nand and aggregate supply w11l 1ncrease Suppo e that Country Ai expe riencing high inflation relative to Co untr y B which is enjoy ing steady growth with a stable price 1eve 1. Wruch of the fo11ow ing would occ ur in the fore ign exc hange market? (A) An increase in the demand for Countr y A s cuttency (B) A n increase in the uppl y of Country B' U.S. will decrease because the people will buy goods from other cheaper countries aggregate demand will decrease but then there will be more of a supply of dollars cuitency., this question deals with (C) A decrease tn the suppl y of Country A s. t ; t d d 1mpor 1ng expr 1ng goo s, an since currency C A. h. h (D) A decrease in the demand for Coun try B's / ountry is experiencing ig -~U!,: ~~)' / inflation/increased price levels, Country B A depreciat ion of Co untr y A' cuitency won't want to buy from this Page 85

33 Macroeconomics Do-Now Please do this: 1. What is the difference between positive and normative economics? 2. What happens to each country's currency when: a. Japan has a budget deficit and increased interest rates relative to the U.S. b. the U.S. Federal Reserve sells bonds at high interest rates 3. In micro and macro, what do classical economists believe? 4. Draw a graph from microeconomics showing market equilibrium. Page 33

34 Macroeconomics Do-Now 1. * positive economics is about what is * normative economics is about what should be 2. * U.S. $ depreciates and Yen appreciates America will invest capital (money) in Japan because of the higher interest rate * U.S. $ appreciates and Yen depreciates Japan will invest capital (money) in America because of the higher interest rate 3. classical economists- the belief that economies will self correct over time Page 34

35 4. Price Macroeconomics Do-Now A Market : ~ / Equilibrium 180 price (Pe) 100 ~ Market equilibrium (Me) l 5 ~ n Equilibrium quantity (Qe) Supply (S) Demand (D) 20 Quantity Page 35

36 Foreign Exchange (FOREX)-Questions 2 1. If the international value of the United State dollar depreciates in co 1nparjson with the Japanese yen. which of the follow ing i mo t likely to occur? (A) United States exports to Japa n will increase. (B) The Unit ed State gove rnment will increase the tatiff on Japa ne e imp orts. (C) The UnHed States balance-of-trade deficit \\dth Japan wi11 become eve n larger. (D) United Sta tes tourj ts can be expec ted to visit Japan in grea ter number. (E) Trade bet\veen the United States and Japa n,,.,ill not be affected. Page 36

37 Foreign Exchange (FOREX)-Questions 2 1. If the international value of the United State dollar depreciates in co 1nparison with the Japan ese yen which of the followi ng i mo t likely to occ ur? (. United States exports to Japan will increase. this would not appreciate the U.S. (B) Th e Unit ed State gove rnment will increase -- currency internationally the tariff on Japa nese imports. (C) The Unit ed States balance-of-trade deficit :>.. with Japan wi11 become eve n larger. nope, since It would cost more to (D) United States tourists can be expec ted to visit buy Japanese goods Japan in grea ter numbers. (E) Tr ade between the United State and Japan _. not in the real world; something will not be affec ted. would change Page 90

38 Foreign Exchange (FOREX)-Questions 2. The price of one ation' currency expressed in terms of another nati,on~ s currency is called (A) the v.rorld price (B) the exchange rate (C) he aw of one price (D) terms of trade (E) purchasing powe.r parity Page 38

39 Foreign Exchange (FOREX)-Questions 2. The price of O e ation' currency expressed in terms of another nation's currency s called (A) the world price the exchange rat e... (C) e aw of one prioe - straight definition (D ) terms of trade E) pure asing -power parity Page 92

40 Foreign Exchange (FOREX)-Questions 45. If a French firm buys computers from the I nited States, there would be an increase in which of the following in the foreign exchange market? (.14..) Demand for United States dollars and supply of euros (B) Demand for both nited States dollars and euros (C) Supply of United States,dollars and demand for euros (D1 ) Supply of both l Tnited States dollars and euros (E) International value of the euro relati e to the United States dollar Page 40

41 Foreign Exchange (FOREX)-Questions 45. If a French firm buys computers from the. nited States, there would be an increase in which of the following in the foreign exchange market? (9 ) Demand for United States dollars and supply of euros (B) Demand for both nited States dollars and ~ at the same time euros (C) Supply of United States,dollars and demand..._are from the U.S. the for eoros _. both can't be demanded nope, since the computers dollar would appreciate and euro depreciate (D) Supply of both United States dollars and... euros both can't be supplied at (E) International value of the euro relative to the the same time United States dollar \nope, since the computers are from the U.S. the dollar would appreciate and euro depreciate Page 94

42 Exchange rate and Macroeconomics Do-Now intere t rates are in1portant for 1nacroecononlic decision inaking. (a) How does an increa e in Japan's goverrunent budget deficit affect each of the following? (i) The real intere t rate in the hort nu1 in Japan. Explain. (ii) Private dorne~tic inveshnent plant and eguiprnent in Japan (b) Draw a co11ectly labeled graph of the foreign exchange tnarket for th euro, and how th effect of the change in the real interest rate in Japan fro1n part (a)(i) on each of the following. (i) Supply of euros. Explain. (ii) Yen price of the euro (c) To teverse the change in the yen price of th euro identified in part Bank buy or sell euros in the foreign exchange n1arket? (b)( iit should the European Cenu al Page 42

43 6 points (2+3 +1) Macroeconomics Do-Now (a) 2 points: One point is earned for stating that the real interest rate in Japan will increase in the short run because the supply of loanable funds will decrease or the demand for loanable funds will increase. One point is earned for stating that private domestic investm.ent in plant and equipment in Japan will decrease. S' Q Q' (b) 3 points: One point is earned for drawing a correctly labeled graph of the foreign exchange market for the euro. One point is earned for showing that the supply curve for euros shifts to the right and for conc luding that the ye n pric e of the euro decreases. One point is earned for explaining that th e European purchases o f Japanese financial assets will increase due to the relatively higher rate of return in Japan. (c) 1 point : One point is earned for stating that Eur opean Ce ntral Bank sho uld buy euros. Page 43

44 Macroeconomics Do-Now Euro QUANTITY OF EURO (d) 3 points : One point is earned for drawing a correct ly labeled graph of the foreign exchange market for the euro. One point is earned for shifting the demand curve to the right and showing an increase in the value of the euro. One point is earned for explaining that the demand for the euro increases because the higher real interest rate in the euro zone leads to higher returns for financial investments in the euro Page 84