Supply for loanable funds

Demand for loanable funds

$\bf{\it{q}}$

XE

    Exchange
rate ($/baht)

Quantity of baht
traded per day

D_1

S

Pegging: the Deutsche Mark Being Undervalued 
                  Against the Dollar (in 1971)

    The demand curve for dollars shifts to the right
 a) when incomes in Japan rise, 
 b) when interest rates in the U.S. rise, or
 c) when speculators decide that the value of the
     dollar will rise relative to the value of yen.
  The supply curve for dollars shifts to the right
 a) when incomes in the U.S. rise,
 b) when interest rates in Japan rise, or
 c) when speculators decide that the value of the
     yen will rise relative to the value of dollar.
    And vice versa.

XE_e

q

XE_p

q_{p1}

q_{p2}

1. The DM was undervalued, causing 
shortage of DM which the Bundesbank 
had to supply in exchange for dollars.
    (Slide the slider_{shortage} to change 
size of the surplus. )

D_2

2. Investors became convinced that the 
value of DM would be revalued and
increased their demand for marks, causing 
the rightward shift of the demand curve. . . 
    (Slide the slider_{demand} to shift the 
demand from D_1 to D_2. )

3. . . . which increased the
shortage of DM . . . 

4. . . . and made
the equilibrium
exchange rate
higher.

XE_e'

demand = 0 (slider from 0 to 1.5, step 0.1)
S(x) = If[1 ≤ x ≤ 9, (0.8 * x)]
D_1(x) = If[1 ≤ x ≤ 9, ((-0.8) * x) + 8]
Equilibrium = Intersect(D_1, S, (4.999999999999999, 4))
P: (x(Equilibrium), 0)
Q: (0, y(Equilibrium))
a = Segment(Equilibrium, P)
b = Segment(Q, Equilibrium)
T_S = Point(S)
T_D = Point(D_1)
shortage = 0 (slider from 0 to 1.5, step 0.1)
v = Vector((0, 0), (10, 0))
u = Vector((0, 0), (0, 9))
B: (5 + shortage, 4 - (0.8 * shortage))
Y_B: (0, y(B))
A: (5 - shortage, 4 - (0.8 * shortage))
X_A: (x(A), 0)
X_B: (x(B), 0)
d = Segment(A, X_A)
e = Segment(B, X_B)
f = Segment(A, B)
c = Segment(Y_B, A)
D_2(x) = If[1 ≤ x ≤ 9, ((-0.8) * x) + 8 + demand]
T_{D2} = Point(D_2)
E = Intersect(S, D_2, (5, 4))
Y_E: (0, y(E))
g = Segment(Y_E, E)
i = Segment(Y_E, E)
C: (5 + shortage + (1.25 * demand), 4 - (0.8 * shortage))
h = Segment(B, C)