Indholdsfortegnelse
Assessment advice Exchange rates Tanja and Selma
1. Produce a table that shows the demand schedule and supply schedule for the pesho when exchange rates are $0, $1, $2, $3, $4, and $5.

2. Draw a diagram to show the demand and supply curves that represent the demand and supply schedules that you have made.

3. Illustrate the exchange rate.

4. Using simultaneous equations, calculate the exchange rate.

5. Explain two factors that might have caused the change in the demand function.

6. Make a new table to show the demand schedule for the new demand function, when exchange rates are $0, $1, $2, $3, $4, and $5.

7. Add the demand curve that represents the new schedule to the diagram that you drew in 2.

8. Illustrate the new equilibrium exchange rate.

9. Explain the likely effect that the change in the exchange rate will have on the demand for exports and imports in country X.

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Uddrag
In HL paper 3, you may be asked to identify the equilibrium exchange rate using linear demand and supply functions. This is no different from finding the equilibrium price in a demand and supply question (see Chapter 3).

Here is an example of the kind of question that you may face. Country X has a currency known as the “pesho”.

The country is involved in international trade and the pesho is a fully convertible currency that is allowed to float freely on the foreign exchange markets.

The demand and supply functions for the pesho are given below:
QD=3200-400E
QS=-400+400E

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We then replace E with the equilibrium price of 4.5, which we found above, in the supply or demand function to get the equilibrium quantity:
QD(4.5) = 3200 – 400(4.5)
QD(4.5)=1400