Macroeconomics Solutions 2022

Running head: ECONOMICS 1
Macroeconomics
Name
Institution

ECONOMICS 2
Solutions
Assuming that the currency for the Eriador is denoted as dory, and the USA dollar is $,
we therefore draw an equilibrium point where by the value of the Eriador currency will be traded
with the USA dollars as shown below;
Figure 1.0: Currency Exchange rate equilibrium
The diagram above shows a flexible exchange rate mechanism i.e. where the demand and
supply of the exchange rate currency is determined by the global macroeconomic variables. The
supply for the US dollar ($) is labeled at e1 which is equal to the USD demand at Q1. It therefore
shows that the higher the value of the US dollar, the more Eriador dory one will be able to
purchase, and the same applies when the value of USD depreciates.
Flexible exchange rate

ECONOMICS 3
Under the flexible exchange rate system, there is no official intervention in the foreign
exchange market i.e. the Central bank of Eriador has no authority to intervene in the foreign
exchange market thus allows the exchange rate between the USD and the Eriador dory to adjust
so as to equate the supply and the demand for the foreign currency in Eriador. This can be
illustrated using the diagrams below;
a) Change in demand for the USD with respect to the Eriador dory currency
Figure 2.0: Change in demand for the USD with respect to Eriador dory
From the figure 2.0 above, there is appreciation for the USD with respect to the Eriador dory
thus leading to an increase in the exchange market structure as shown above. Thus, since the
demand must equal supply of the currency in the global market, there is change in the demand
from D1 to D2 as shown in the figure above which equates e2=Q2.
b) Change in Supply of the USD with respect to Eriador dory currency