7.1 Suppose the demand function for U.S. dollars by holders of Japanese yen is Qd1 = 1000 - 5x, where Q is the amount of U.S. dollars per day and x is the exchange rate (yen per dollar). The supply function of U.S. dollars available to be exchanged into Japanese yen is Qs1 = 100 + 4x.

a. Create a spreadsheet with columns for the exchange rate, x, the quantity demanded, and the quantity supplied. Let the exchange rate range from 50 to 150 in increments of 10. Determine the equilibrium exchange rate using the spreadsheet.

b. Now suppose that the U.S. Federal Reserve announces a long-run low interest rate policy that causes the foreign demand for U.S. dollars to fall. The new demand function is Qd2 = 850 - 4x. The Japanese investors begin to liquidate their holdings of U.S.

assets, increasing the supply of U.S. dollars to Qs2 = 130 + 4x. Add additional columns for Qd2 and Qs2 to the spreadsheet from part a and determine the new dollar-yen exchange rate.

c. Use the Excel charting tool to draw the graphs of the demand and supply curves for U.S. dollars to illustrate the change in the equilibrium exchange rate.