Economi

cEconomic Analysis Exam Tips

Question 1

The first questions focus is on exchange rates, so what are they, and how does the market determine them.  The second part of this question asks students to apply this to the tourism industry.

1. What are the exchange rates.什么是exchange rate.

An exchange rate is the rate at which one currency trade for another on the foreign exchange market.

2. How does the market determine the exchange rate

a. In a free foreign exchange market, the rate of exchange is determined by demand and supply. This is known as a floating exchange rate. If country A’s importers want to buy goods from country B, and the residents of A want to invest in B, then they will supply A dollars on the foreign exchange market in border to obtain B dollars.

b. The higher the exchange rate, the more B dollars they will obtain for their dollars. This will effectively make Country B goods cheaper and investment more profitable. Thus the higher the exchange rate, the more dollars will be applied. (因为有更多的人有了兑换的意愿). The supply curve of A dollars will slop upward.

c. 相反， for country B’s importers and residents, if they want to buy the goods and invest in country A, they will supply the B dollars to foreign exchange market, and they demand the A dollars. The lower the exchange rate, they obtain more A’s goods and assets. Hence the lower the exchange rate, the higher demand. The demand curve slopes down wards.

d. The equilibrium exchange rate will be where the demand for A dollars equals the supply. If the current exchange rate was above the equilibrium, the supply of dollars will exceed the demand. The banks will lower the exchange rate to encourage the demand and reduce the supply. Similarly, if the rate was below the equilibrium, the demand of dollars will exceed the supply. The banks will raise exchange rate high until the supply equals the demand.

e. Any shift in the demand or supply curve will cause the exchange rate to change. A...