Documented Problem Solving: Foreign Exchange Rates - Supply and Demand
and is replicated here as part of the SERC Pedagogic Service.
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.
- understand the determinants of foreign exchange rates in a flexible exchange rate system;
- recall that the key force moving prices in competitive markets are shortages and surpluses.