Suppose the Australian dollar floats against the US dollar and the demand for Australian dollars in the foreign exchange market is given by 𝑄=100−50𝐸 where Q denotes the quantity of AUD and E denotes the nominal exchange rate expressed in USD per AUD. The supply of Australian dollars is given by 𝑄=20+50𝐸 . What is the equilibrium nominal exchange rate?Group of answer choices0.801.001.201.50
Question
Suppose the Australian dollar floats against the US dollar and the demand for Australian dollars in the foreign exchange market is given by 𝑄=100−50𝐸 where Q denotes the quantity of AUD and E denotes the nominal exchange rate expressed in USD per AUD. The supply of Australian dollars is given by 𝑄=20+50𝐸 . What is the equilibrium nominal exchange rate?Group of answer choices0.801.001.201.50
Solution
To find the equilibrium nominal exchange rate, we need to set the quantity demanded equal to the quantity supplied and solve for E.
The demand for Australian dollars is given by Qd = 100 - 50E. The supply of Australian dollars is given by Qs = 20 + 50E.
Setting Qd = Qs, we get:
100 - 50E = 20 + 50E
Solving for E, we get:
100 - 20 = 50E + 50E 80 = 100E E = 80 / 100 E = 0.80
So, the equilibrium nominal exchange rate is 0.80 USD per AUD.
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