Appetite for Imports
The question
Assume the foreign exchange market for the US dollar is initially in equilibrium. US households begin purchasing significantly more imported electronics from South Korea. Show the effect of these import purchases in the foreign exchange market for the US dollar, holding all else constant. Show the effect on the Foreign Exchange Market (USD) graph.
Drag a curve, or use the arrow buttons. Want the free-play version with every control? Open this graph in the sandbox.
Appetite for Imports: the worked answer
On the Foreign Exchange Market (USD) graph, Supply of dollars (S$) shifts right.
Why Supply of dollars (S$) shifts right
To pay for Korean electronics, US households must exchange dollars for South Korean won. Americans exchanging dollars for foreign currency are the source of the supply of dollars in this market, so the increase in import buying raises the quantity of dollars supplied at every exchange rate and shifts supply right. Foreigners' willingness to acquire dollars has not changed, so the demand for dollars stays put.
What happens to the equilibrium
The dollar depreciates and the equilibrium quantity of dollars traded increases.
The mistake students make on this one
Students often shift the demand for dollars right because Americans are described as demanding more of something. What Americans demand here is Korean goods, which forces them to demand won and supply dollars; the D$ curve tracks foreigners wanting dollars, not Americans wanting products.
On exam day
Rewrite every FX stem as "who must convert which currency." US buyers of imports have to sell dollars, so more imports means S$ right and a weaker dollar.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when Supply of dollars (S$) shifts right and every other curve on the Foreign Exchange Market (USD) graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
More Foreign Exchange Market (USD) scenarios
Last updated