Question

Explain how the following events affect variables 1 through 3 ; other things unchanged. Event: The Fed sells Chinese currency, yuan, to purchase dollar from the foreign exchange markets: Variable 1: Supply of dollar in the foreign exchange markets (increase, decrease, not changed; briefly explain). Variable 2: Value of dollar in the foreign exchange markets (appreciate, depreciate, unaffected; briefly explain). Variable 3: American goods exported to China (increase, decrease, not change; briefly explain)

Answer 1

The concept of the model of demand and supply is simple. The demand curve shows the quantities of a particular product or service that buyers will be willing and able to purchase at each price during a specified period.

The supply curve shows the volume that sellers will offer for sale at each price during that same period.

By putting the two curves on each other, we should be able to find a price at which the volume buyers are willing and able to purchase equals the quantity sellers will offer for sale.

With an upward-sloping supply curve and a downward-sloping demand curve, there is only one price at which the two curves intersect with each other.

This means there is only one price at which parity is achieved. It follows that at any price other than the parity price, the market will not be in equilibrium. We next survey what happens at prices other than the equilibrium price.

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