In-Class Exercise # 1: Supply / Demand Schedules in the FX Market
The table below presents the supply and demand schedules for BP (from the US view
point).
Price of BP
Schedule A
(# of BP supplied
or demanded)
Schedule B
(# of BP supplied or
demanded)
$1.40
1,000,000
10,000,000
$1.45
2,000,000
8,000,000
$1.50
3,000,000
6,000,000
$1.55
4,000,000
4,000,000
$1.60
5,000,000
2,000,000
$1.65
6,000,000
1,000,000
a) Identify the:
Supply schedule: Schedule A
Demand schedule: Schedule B
b) What would be the clearing price for BP in the foreign exchange market? Why?
$1.55, because at that price, quantity demanded = quantity supplied
c) What would happen if both the US and the British governments fixed the price of
BP at $1.45? Excess demand for BP
d) Calculate the excess supply or demand for BP if both the US and the British
governments fixed the price of BP at $1.60.
Excess supply for BP = 5,000,000 - 2,000,000 = 3,000,000
In-Class Exercise # 2: The effects of economic factors in FX Market
Please used the list of graphs to answer questions 1, 3, and 5.
1. If the US inflation rate increased by 2% while the British inflation rate
increased by 1%, identify which graph best describes what happens in the
foreign exchange market for BP: Graph B
2. If the US inflation rate increased by 2%, while the British inflation rate
increased by 3%, complete each one of the statements below:
a. The demand for BP in the FX market will: decrease
d. The supply of BP in the FX market will: increase
c. The price of BP in the FX market will: decrease
3. If the US real interest rate increased by 2% while the British real interest
rate did not change, identify which graph best describes what happens in the
foreign exchange market for BP: Graph A
4. If the US real interest rate increased by 2% while the British real interest
rate increased by 4%, complete each one of the statements below:
a. The demand for BP in the FX market will: increase
d. The supply of BP in the FX market will: decrease
c. The price of BP in the FX market will: increase
5. If the US economy moved into a recession, while the British economy
remained the same, identify which graph best describes what happens in the
foreign exchange market for BP: Graph D or Graph H