Draw a foreign exchange market diagram to show equilibrium with a flexible or floating exchange rate. Suppose the initial exports X is $110, the supply curve is given by er = 0.01X, and the demand curve is given by er = 2.2 - 0.01X.

a)Plot the supply and demand curves of the foreign exchange market. Plot the new supply curve if the supply of US dollars declines at all levels of exports by $30.

Demand Curve

b)How does the decline in exports affect the foreign exchange rate?

The decline in exports

(Select One)

the balance on current account balance and

(Select One)

the supply of foreign

exchange derived from export receipts. The exchange rate rises by

0

to maintain equilibrium in the balance

of payments. The supply curve shifts to the

(Select One)

.

c)How do exports and imports change to give balance of payments equilibrium at the new equilibrium exchange rate?

The decline in exports would create a

(Select One)

on the current account. The profitability and competitiveness of

exports is

(Select One)

. The supply of foreign exchange from exports is

(Select One)

to establish equilibrium.