EECS 3101 Lecture Notes - Lecture 22: Pound Sterling, Demand Curve
28 Jun 2018
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EECS 3101 Lecture 22 Notes
Introduction
Demand for a Currency
At any given moment, a currency should exhibit the price at which the demand for that
currency is equal to supply
This is the equilibrium exchange rate.
Of course, conditions can change over time.
These changes induce adjustments in the supply of or demand for any currency of
interest, which in turn creates movement in the currency’s price.
The British pound is used here to explain exchange rate equilibrium.
The United Kingdom has not adopted the euro as its currency and continues to use the
pound.
The U.S. demand for British pounds results partly from international trade, as U.S. firms
obtain British pounds to purchase British products.
In addition, there is U.S. demand for pounds due to international capital flows, as U.S.
firms and investors obtain pounds to invest in British securities.
Exhibit 4.2 shows a hypothetical number of pounds that would be demanded under
several different values of the exchange rate.
At any point in time, there is only one exchange rate; the exhibit shows how many
pounds would be demanded at various exchange rates for a given time.
This demand schedule is downward sloping because corporations and individuals in the
United States would purchase more British goods when the pound is worth less (since
then it takes fewer dollars to obtain the desired amount of pounds).
Conversely, if the pound’s exchange rate is high then corporations and individuals in the
United States are less willing to purchase British goods (since the products or securities
could be acquired at a lower price in the United States or other countries).
A currency should exhibit the price at which the demand for that currency is equal to
supply
Document Summary
At any given moment, a currency should exhibit the price at which the demand for that currency is equal to supply. United states are less willing to purchase british goods (since the products or securities could be acquired at a lower price in the united states or other countries). A currency should exhibit the price at which the demand for that currency is equal to supply. Of course, conditions can change over time. These changes induce adjustments in the supply of or demand for any currency of interest, which in turn creates movement in the currency"s price. The british pound is used here to explain exchange rate equilibrium. The united kingdom has not adopted the euro as its currency and continues to use the pound. The u. s. demand for british pounds results partly from international trade, as u. s. firms obtain british pounds to purchase british products.
