4.5 Exchange Rates

The exchange rate is THB 26 = CAD 1, meaning every Canadian dollar buys 26 Thai baht. The traveller wants to convert CAD 800.

Multiply the amount in CAD by the exchange rate: $800\times 26=20,800$

The traveller receives THB 20,800. The exchange rate is acting as a simple conversion factor, translating Canadian dollars into their Thai baht equivalent.

We need to convert CAD 800 into THB using the rate THB 26 = CAD 1. The correct operation is multiplication: $800\times 26$.

THB 26,000 would only be correct if the traveller had CAD 1,000, since $1,000\times 26=26,000$. The traveller has CAD 800, not 1,000, so this is wrong.

THB 30,800 and THB 18,400 do not result from any straightforward application of the given rate to CAD 800, suggesting arithmetic errors or incorrect operations (e.g. dividing instead of multiplying or adding/subtracting rather than multiplying).

Only THB 20,800 correctly reflects $800\times 26$, so this is the right answer.

The question asks about the fundamental nature of currency demand in the foreign exchange market. The key economic concept here is derived demand.

A currency is not desired for its own sake. It is demanded because it is required to purchase a country's exports, buy assets denominated in that currency (capital inflows), or hold it speculatively in anticipation of future appreciation. This is derived demand — demand that comes from demand for something else.

The first option accurately captures all three sources of currency demand (exports, assets, speculation) and correctly labels this as a derived demand, matching the established economic definition.

The correct answer is that currency demand is derived demand from underlying transactions and expectations, not a primary demand for the currency itself.

We need to identify the accurate description of currency demand in the foreign exchange market, focusing on its economic nature.

The option describing currency demand as a primary demand driven by consumers wanting domestic savings is incorrect — currency demand from foreigners arises from wanting to buy that country's goods, assets, or currency itself, not from domestic savers wanting their own currency.

The option claiming the central bank determines demand confuses demand with intervention. Central banks may influence supply (by selling currency) under fixed or managed float systems, but they do not set the quantity demanded by foreign participants.

Describing currency demand as constant over time is clearly inconsistent with reality — exchange rates fluctuate constantly, reflecting ongoing changes in demand driven by shifts in trade, interest rates, and speculation.

Only the option describing currency demand as derived demand from exports, asset purchases, and speculation correctly captures the economic nature of foreign exchange demand.

Foreign investors buying Swedish government bonds are undertaking a capital inflow into Sweden. To purchase SEK-denominated bonds, these investors must first acquire Swedish kronor on the foreign exchange market.

When foreigners demand more SEK to buy Swedish assets, the demand for SEK increases. On the forex market diagram, the demand curve for SEK shifts rightward (increases).

With supply of SEK unchanged, a rightward shift of the demand curve raises the equilibrium price of SEK in terms of other currencies. The SEK therefore appreciates.

The correct outcome is a rightward demand shift and SEK appreciation, reflecting the standard relationship between capital inflows and increased currency demand.

We need to identify the forex market effect of a capital inflow (foreign purchases of Swedish bonds), determining which curve shifts, in which direction, and the resulting exchange rate movement.

Both options involving the supply curve of SEK shifting are wrong. Supply of a currency increases when Swedish residents sell SEK to buy foreign assets or imports — not when foreigners buy Swedish assets. Foreign bond purchases affect the demand side.

A leftward shift of demand would occur if fewer foreigners wanted SEK — for example, if Swedish interest rates fell or investor confidence dropped. The scenario describes increased purchases, so demand rises, not falls.

Only the option showing the demand curve shifting rightward and the SEK appreciating correctly reflects the mechanism: foreign capital inflows require foreigners to buy SEK, increasing demand and raising the exchange rate.

The supply of GBP in the forex market comes from UK residents, firms, and institutions who sell pounds to obtain foreign currency. This happens when UK residents buy imports, invest abroad, or convert pounds for other reasons.

When British residents buy EU imports, they need euros to pay European exporters. To get euros, they sell (supply) pounds on the forex market. More imports from the EU means more pounds are supplied — the supply curve for GBP shifts rightward.

The other scenarios (higher UK interest rates, foreign tourists, foreign buyers of UK goods) all increase demand for GBP by foreigners, not supply. Supply of GBP comes from domestic holders, not foreign ones.

British residents buying more EU imports is the only scenario that increases the supply of GBP to the foreign exchange market.

We need to find the scenario that increases the supply (not demand) of GBP in the forex market. Supply comes from UK residents selling pounds to acquire foreign currency.

Higher UK interest rates attract foreign capital inflows, meaning foreigners want to buy GBP to invest in UK assets. This increases demand for GBP, not supply.

Tourists converting their foreign currency into pounds are buying GBP, which increases demand for GBP. This does not add to the supply of pounds.

Foreign buyers of UK exports must acquire GBP to pay UK exporters — again, this is an increase in demand for GBP. It comes from the foreign side, not domestic holders.

Only British residents buying more EU imports causes UK residents to sell pounds (supply them) on the forex market in order to obtain euros, correctly increasing the supply of GBP.