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USING SUPPLY AND DEMAND. The Price of a Foreign Currency . People demand a country’s currency to buy its goods, services, and assets. The market for currencies is called the foreign exchange market The exchange rate is the price of one currency in terms of another currency.
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The Price of a Foreign Currency • People demand a country’s currency to buy its goods, services, and assets. • The market for currencies is called the foreign exchange market • The exchange rate is the price of one currency in terms of another currency. • Rates are determined by supply and demand in the foreign exchange market.
The Euro • The 13 members of the European Union use a common currency, the euro. • The value of a euro was $0.85 in 2001. • By the early 2000s the euro had risen to $1.30 because U.S. interest rates decreased. So: • Europeans bought fewer U.S. financial assets. • Americans bought more European financial assets.
Euro Supply and Demand • Supply of euros represents people who want to sell euros and buy dollars • Demand for euros represents people who want to buy euros and sell dollars. S Price of euros in dollars $0.85 D Quantity of Euros
S1 $1.30 D1 Why the euro increased in Price Europeans buy fewer U.S. financial assets and ↓supply of euros. S0 Price of euros Americans buy more European financial assets and ↑demand for euros. $0.85 The price of euros Increases to $1.30. D0 Quantity of Euros
$2,000 Shortage $500 Price Ceilings: Rent Controls S • New York City has rent controls • Rent control cause housing shortages • Increase demand • Reduce supply • Rent controls also cause strange behaviors Rent per Month D QS QD Quantity of apartments
Price Floors: Minimum Wage S Wmin • The U.S. government has established a minimum wage that firms can legally pay. • A minimum wage, Wmin, above the equilibrium wage, We, • Helps those who are employed, Q2, • Hurts those who would have been employed at We, but can no longer find employment, Qe- Q2. We Wage per hour D Q2 Qe Q1 Quantity of Workers
Excise Taxes • An excise tax is a tax that is levied on a specific good. • Excise taxes raise prices and reduce the quantity exchanged.
S1 $70,000 65,000 420 Excise Tax on Luxury Boats A $10,000 excise tax shifts the supply curve up by $10,000. D S0 60,000 The result of the tax is to reduce equilibrium quantity of boats by 90 units. Price of luxury boats Increase equilibrium price by less than $10,000. 0 510 600 Quantity of luxury boats
Quantity Restrictions Because taxi medallions were limited in supply, as demand for taxi services rose, so did the demand for medallions, increasing their price to $2500 by 1947. Today, medallions sell for $400,000! In 1937 New York City limited the number of taxi licenses to 12,000 to increase the wages of taxi drivers.
