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The Figure shows the quantity of dollars for sale corresponding to each possible
exchange rate. When the dollar value is high, U.S consumers and firms are more
likely to purchase Bangladeshi goods. Thus, they supply a greater number of
dollars to the market, to be exchanged for Takas. Conversely, when the dollars is
valued low, the supply of dollars for sale is smaller, reflecting less U.S desire to
obtain Bangladeshi goods.
Q: Equilibrium
Equilibrium exchange rate is a rate at which the quantity demand for currency is
equal to the supply of that currency. Equilibrium exchange rate can be shown by
the following diagram.
From the figure we can see that at an exchange rate of tk.70, the quantity of
dollars demanded would exceed the supply of dollars for sale. Consequently, the
banks that provide foreign exchange services would experience a shortage of
dollars at that exchange rate. At an exchange rate of tk.80, the quantity of dollars
demanded would be less than the supply of dollars for sale. Therefore, banks
providing foreign exchange services would experience a surplus of dollars at that
exchange rate. In this figure, the equilibrium exchange rate is tk.75 because this
rate equates the quantity of dollars demanded with the supply of dollars for sale.
INT = Changes in the differential between local interest rate and the foreign
countrys interest rate
INC = Changes in the differential between local income level and the foreign
countrys income level
GC = Changes in government controls
EXP = Changes in expectation of future exchange rates