Module 7 • Homework — FX Demand & Supply Shifts

One question, multiple scenarios: draw the FX market shifts and explain the direction.
Print
Due: with the first midterm exam
Deliverable: a photo/scan of your drawn curves + short written answers
Single homework question:
For each scenario below, use a demand & supply diagram for the USD in FX markets.
  1. Draw the baseline curves D0 and S0 (already shown).
  2. Decide which curve shifts (or both): Demand for USD and/or Supply of USD.
  3. Draw the new curves D1 / S1 and mark the new equilibrium P*.
  4. Write 3–5 sentences: (a) what shifted, (b) why, (c) whether USD appreciates or depreciates.
Tip Appreciation = P* rises (stronger USD) Tip Depreciation = P* falls (weaker USD) Supply rule S ↑ = Americans sell more USD → S shifts right (outward)
Student info
Name: ____________________________    Section: __________    Date: __________
Upload: one PDF or 3–5 photos (clear labels for D0/D1/S0/S1).

Scenarios

Open each scenario. First: draw it yourself. Then (optional) click Reveal model shift to check your logic.

Scenario 1 — New Fed Chair perceived as more hawkish (higher expected real rates) Rates & expectations
Likely channel: capital inflows Think: returns on USD assets ↑
D0 baseline demand S0 baseline supply D1 after shock S1 after shock P=exchange rate; Q=quantity traded
Your task (write 3–5 sentences):
  1. Which curve shifts and why?
  2. Does USD appreciate or depreciate? Explain using P*.
  3. State what happens to Supply even if it does not move (e.g., “S stays at S0”).
Scenario 2 — War risk spikes (e.g., Iran conflict escalates) Risk-off / safe-haven
Likely channel: safe-haven flows Think: global uncertainty ↑
D0 baseline demand S0 baseline supply D1 after shock S1 after shock
Your task (write 3–5 sentences):
  1. Is this mostly a demand story or a supply story?
  2. Does USD appreciate or depreciate? Why?
  3. State what happens to Supply even if it does not move.
Scenario 3 — Peace talks progress (Russia–Ukraine risk premium falls) Risk premium down
Likely channel: risk-on shift Think: safe-haven bid ↓
D0 baseline demand S0 baseline supply D1 after shock S1 after shock
Your task (write 3–5 sentences):
  1. What happens to safe-haven demand for USD when uncertainty falls?
  2. Does USD appreciate or depreciate? Why?
  3. State what happens to Supply even if it does not move.
Scenario 4 — Your own combo (one factor raises D, another raises S) Ambiguous
Choose any two factors: (1) inflation, (2) real rates, (3) public debt risk, (4) crisis risk.
Make one factor shift demand and the other factor shift supply in the opposite direction.
Your task:
  1. State your two chosen factors and which curve each shifts.
  2. Draw both shifts on the graph.
  3. Explain why the net effect on P* could be ambiguous.