Rising Remittances Home
The question
Assume the foreign exchange market for the US dollar is initially in equilibrium. Workers living in the United States begin sending much larger sums to relatives in the fictional country of Palona, and those relatives receive the funds in Palonan currency. Show the effect of these transfers 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.
Rising Remittances Home: the worked answer
On the Foreign Exchange Market (USD) graph, Supply of dollars (S$) shifts right.
Why Supply of dollars (S$) shifts right
For relatives in Palona to receive Palonan currency, the dollars that workers send must be exchanged for that currency in the foreign exchange market. Dollars offered in exchange for foreign currency are the supply of dollars, so larger transfers raise the quantity of dollars supplied at every exchange rate and shift the supply of dollars to the right. Nothing in the scenario gives foreigners a new reason to acquire dollars, 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 reach for the demand curve here, either shifting it right because a large sum of money is changing hands or shifting it left because dollars are leaving the country. Dollars leaving the United States this way are dollars being sold for foreign currency, and sellers of dollars are the supply side of the market.
On exam day
Remittances, foreign aid, and any one-way transfer out of the United States behave exactly like imports on the FX graph: they put more dollars up for sale, so S$ shifts right and the dollar depreciates.
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.
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