Chapter 11: Problem 3

The supply and demand for foreign exchange are considered to be derived schedules. Explain.

Short Answer

Expert verified

The supply and demand for foreign exchange are considered to be derived schedules because they are fundamentally influenced by other factors in the international economy, such as interest rates, trade flows, and political stability among others. The interplay of these factors influences the demand for and supply of different currencies, which in turn determines exchange rates.

Step by step solution

Understanding supply and demand in the context of foreign exchange

The concept of supply and demand is a fundamental principle in economics. This principle stipulates that the price for a product in a competitive market will vary until it settles at a point where the quantity demanded by consumers equals the quantity supplied by producers, resulting in equilibrium. In the context of foreign exchange, currencies are the 'product', and their price is determined by their exchange rates.

Understanding the concept of derived schedules

A derived schedule in economics means that these schedules are dependent, or derived, from other factors. They do not exist in a vacuum and are affected by other elements of the economic landscape.

Making the connection between foreign exchange supply/demand and derived schedules

The supply and demand for foreign exchange are derived schedules because they are fundamentally influenced by other factors in the economy. The demand for a certain currency, for example, can increase if the interest rates in the country where that currency is used increase. Similarly, the supply of a particular currency can go up if the country where that currency is used exports more goods and services.

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The supply and demand for foreign exchange are considered to be derived schedules. Explain.

Short Answer

Step by step solution

Understanding supply and demand in the context of foreign exchange

Understanding the concept of derived schedules

Making the connection between foreign exchange supply/demand and derived schedules

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