In a foreign exchange market operating under a flexible exchange rate system, the quantity demanded of US Dollars () in millions is given by , and the quantity supplied is given by , where is the exchange rate in Nigerian Naira per US Dollar (). If an increase in import demand shifts the dollar demand curve upward by million dollars at every exchange rate level, by how many Naira per Dollar will the equilibrium exchange rate increase?
Answer: 50 NGN/USD
Answer
The equilibrium exchange rate increases by 50 NGN/USD.
Under a floating exchange rate system, the equilibrium exchange rate is determined by the intersection of foreign currency supply and demand. Initially, setting yields . When demand for foreign currency increases autonomously by million dollars, the demand curve shifts rightward to . Equating this new demand with supply gives . The net increase in the rate is .
Step-by-Step Solution
Key Concept
Determination of Equilibrium Exchange Rates and Demand Curve Shifts