Consider the following foreign exchange market: DFX: e = edo - edQx + ed (r-r) +...

Transcribed Image Text:

Consider the following foreign exchange market: DFX: e = edo - ed₁Qx + ed₂ (r-r¹) + edzY SFX : e = eso + e81FX Consider only the FX market, and not the impacts upon the rest of the economy. Suppose the responsiveness of foreign currency demand to changes in foreign interest rates increases. How does this affect the equilibrium exchange rate and foreign currency holdings (e*,Q)? Assume all parameters are positive, and r, rf, Y> 0 with r<rf. A. e* decreases ,Q; decreases B. e* decreases,Qz increases C. e* increases,Qz increases D. e* increases ,Q, decreases Consider the following foreign exchange market: DFX: e = edo - ed₁Qx + ed₂ (r-r¹) + edzY SFX : e = eso + e81FX Consider only the FX market, and not the impacts upon the rest of the economy. Suppose the responsiveness of foreign currency demand to changes in foreign interest rates increases. How does this affect the equilibrium exchange rate and foreign currency holdings (e*,Q)? Assume all parameters are positive, and r, rf, Y> 0 with r<rf. A. e* decreases ,Q; decreases B. e* decreases,Qz increases C. e* increases,Qz increases D. e* increases ,Q, decreases

Answer rating: 100% (QA)

The given equations represent the demand and supply functions in the foreign exchange market DFX ... View the full answer