Foreign Exchange Rates: Solidifying a Student's Grasp of Supply and Demand
In this assignment, students think about four events that would affect a country's exchange rate. For each event, students complete three steps: a) deciding whether demand would shift, and if so, in what direction, b) deciding whether supply would shift, and if so, in what direction, and c) deciding whether the shift(s) in demand and/or supply would cause a shortage/appreciation or a surplus/depreciation. While completing these steps, students document their method for making each decision.
Students should solidify their grasp of the determinants of foreign exchange rates in a flexible exchange rate system. It should also reinforce the idea that the key force moving prices in competitive markets are shortages and surpluses.
Context for Use
This activity is an assignment that could be used in class or out of class, as a homework assignment. It would be appropriate after students have been introduced to the supply and demand model of exchange rate determination.
Description and Teaching Materials
The file provided contains four foreign exchange rate problems, preceded by an explanation of documented problem solving.
Student Handout of Four Foreign Exchange Rate Problems (Microsoft Word 2007 (.docx) bytes Apr12 10)
Teaching Notes and Tips
This is an easy-to-grade assignment that could be used in class or as homework. It might best be used right after students have learned the supply and demand model of exchange rates the first time, before they have tried to draw and shift curves themselves.
References and Resources