Fig. 1 shows the market for US dollars in Manila in July 2026. The vertical axis records the exchange rate in Philippine pesos (PHP) per US dollar. Importin...
Question 1 Report
Fig. 1 shows the market for US dollars in Manila in July 2026. The vertical axis records the exchange rate in Philippine pesos (PHP) per US dollar. Importing firms demand dollars to pay foreign suppliers, while tourism receipts and export earnings provide a supply of dollars. The market is initially at equilibrium E. A new group of overseas investors plans to buy Philippine government bonds, bringing dollars into the country. This foreign currency transaction may affect the price of imports, including machinery used by domestic firms.
(a) What is the equilibrium exchange rate and equilibrium quantity of dollars shown in Fig. 1? [2]
(b) Identify the likely shift in Fig. 1 when the overseas investors exchange dollars for PHP. [2]
(c) Explain two likely effects of this change in the exchange rate on the quantity and price of Philippine imports. [4]
Answer Details
(a) The equilibrium exchange rate is PHP55 per US dollar. [1] The equilibrium quantity is $40 million per day. [1]
(b) The supply of US dollars shifts right. [1] Investors bring dollars into the Philippines and sell them for PHP in order to buy government bonds. [1]
(c) The increased supply of dollars lowers the PHP price of one dollar, which means the peso appreciates. [1] Foreign imports become cheaper in PHP. [1] The quantity demanded of imports is therefore likely to increase. [1] Domestic firms may buy cheaper imported machinery, while consumers may switch from domestic goods to cheaper imports. [1]
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