Suppose the European demand for a U.S. machine is given by the following equation:
q = 240,000/p
Here q is the quantity of U.S. machines bought by the Europeans and p is the price, in euros, of the U.S. machine.
(a) If the exchange rate is 0.8 euros per dollar and the dollar price of the machine is $12,000, what is the euro price of the machine?
(b) According to the demand function just given, how many machines would the Europeans buy?
(c) If the dollar price of the machine remained unchanged, but the exchange rate fell to 0.625 euros per dollar, what would the euro price of the machine now be?
(d) Now how many machines would the Europeans buy?
(e) At the exchange rate of 0.8 euros per dollar, what is the quantity demanded of dollars by the Europeans?
(f) At the exchange rate of 0.625 euros per dollar, what is the quantity demanded of dollars by the Europeans?
(g) If this machine were the only U.S. export to the Europeans, draw the European demand curve for dollars. Put the dollars demanded on the horizontal axis and the euro/$ exchange rate on the vertical axis.
(h) At the exchange rate of 0.8 euro per dollar (or $1.25/euro), what is the quantity supplied of euros by the Europeans?
(i) At the exchange rate of 0.625 euro per dollar (or $1.60/euro), what is the quantity supplied of euros by the Europeans?
(j) If this machine were the only U.S. export to the Europeans, draw the European supply curve of euros. Put the euros supplied on the horizontal axis and the $/euro exchange rate on the vertical axis.