Consider world consisting of two trading entities: the US and the EU. The EU is the exporter of cheese to the US and the importer of oil from the US. Assume the world price of both cheese and oil are set in terms of dollars ($). Also assume that there is no barriers or restrictions on trade for either good.Also assume that the entire exchange between the US and EU is made of trade account transactions and that there are NO capital/financial account transactions between them.

The following table represents the information about the EU's import of oil. Note that the price of oil is denominated in the US dollar ($) and is equal to $30per barrel.

1	2	3	4
Exchange rates ($/)	The euro price of oil ()	The EU quantity of oil imports	The number of euro supplied ()
1.2	?	50	?
1.5	?	75	?
1.8	?	100	?

(a) Using the information above derive the supply of Euro by filling in the blanks.

The following table represents the information about the EU's exports of cheese. Note that the price of cheese is also denominated in the US dollar ($) and is equal to $100per ton.

1	2	3	4
Exchange rates ($/)	The euro price of cheese ()	The EU quantity of cheese exports	The number of euro demanded ()
1.2	?	15.5	?
1.5	?	22.5	?
1.8	?	25	?

b. Using the information above derive the demand for Euro by filling in the blanks.

c. Draw a diagram to depict the supply and demand curve for euro as found above. What is the equilibrium value of the exchange rate?

d. Is this foreign exchange market stable? Why? Does your answer to part (c) have anything to do with the Marshall- Lerner condition? Explain.

e. Would your answer to (d) change if the EU quantity of oil imports (column 3) in the first table changed to 50, 60 and 70 (instead of 50, 75, 100)? Explain.