00:01
So let's go over this question.
00:09
So equilibrium exchange rate is determined through optimum demand and supply.
00:15
So let's draw a graph to illustrate what equilibrium exchange rate is.
00:21
So let's say that we're looking at dollars in terms of pesos.
00:27
We have dollars over pesos, and then we would have quantity of dollars.
00:34
So here you can see that the dollars would be on top in the exchange rate and the quantity would be for the currency on top so then we have supply and demand of dollars so our equilibrium exchange rate is where supply and demand cross and this would be the exchange rate on the foreign market so then let's talk about stability condition condition.
01:40
This is dependent on price elasticity of imports and exports.
01:44
This is because when there is a lower elasticity, there is higher stability.
02:17
So there is a more stable situation so the exchange rate does not fluctuate as much.
02:26
So this is basically what it means.
02:47
So recall that price elasticity of demand is percentage change in quantity demanded over percentage change in price.
02:59
So this measures responsiveness of quantity demanded to price.
03:05
And if we look at it graphically, let's say that we have two demand curves.
03:22
So this one is more elastic and then we have our supply curve.
03:29
So this could be for either imports or exports.
03:33
So the price elasticity of demand is higher this is more elastic so with the small change in price is a large change in quantity likewise if this is lower is less elastic so the opposite would be true with a large change in price there's a small change in quantity so basically the quantity is less responsive to changes in price...