The Economics Classroom

12.4 Calculating exchange rates 

Part 1 - Calculating prices in different currencies

1. After travelling to France from Morocco, Majid received his credit card bill and noticed
that the restaurant meal that had cost him 30 Euros was listed on his statement as
costing 340 Dirham. What does this suggest is the currency exchange rate of Euros in
terms of Dirhams?

2. It has always been Julia’s dream to buy a Ural motorcycle from Russia. Searching online
one day, she noticed a recent model for sale for 350,000 Russian rubles. If the
exchange rate of US dollars in terms of rubles is 32, how much would her dream
motorcycle cost in terms of USD?

3. While on holiday in Thailand, Lee Hong from Singapore noticed that while he had gotten
2500 Thai Baht last week per $100 SGD note, on his most recent trip to the money
changer he had received 2650 Baht per $100 SGD note.
a. Calculate the initial exchange rate for Thai Baht in terms of Singapore dollars.

b. Had the Thai Baht appreciated or depreciated during Lee Hong’s holiday? By
what percentage had it changed in value?
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Part 2 - Linear equations and exchange rates

4. If the demand and supply functions for the Philippine Peso are defined as
Qd = 10,000 – 3,000P and Qs = -5,000 + 2,000P,

where P is the price of the Philippines Peso in terms of US cents:

a. What is the equilibrium exchange rate of the Philippine Peso in terms of US
cents?

b. Given this exchange rate, what would be the exchange rate of US dollars in
terms of Philippine Pesos?

c. If the Philippines decided to raise interest rates (to control inflation), how would
demand for Pesos change? What variable of the linear equation would change,
and in what way?

d. If the Philippines decided to devalue its currency, and therefore sold Pesos to
buy dollars...how would the supply of Pesos change? What variable of the linear
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supply equation would change, and in what way?

e. Assume the new supply of Pesos in the forex market is represented by

Qs = -2,500 + 2,000P,
where P is the price of the Philippines Peso in terms of US cents. Calculate the
new exchange rate of the Philippines Peso in terms of dollars and the new
exchange rate of the dollar in terms of pesos.