Let us consider a market for foreign exchanges namely market for dollars/Wons in Korea.
a). What would determine the supply side of this markets, namely what are the sources of supply of dollars in this markets?. Please try to list several sources.
b) What would determine the demand side of this market, namely what are the sources of demand for dollars in this markets? Please list several sources.
c) Now assume that Korean currency (Won) is too much over-valued in terms of its impacts of trades (exports and imports) so that the Korean economy is incurring trade deficits. If this situation continues for a while, how would this show up in the supply and demand function of dollars and also the value of Korean won subsequently? Do you think there is automatic price mechanism working to bring the foreign exchange market back into equilibrium so that it may boost exports and discourage imports, assuming other things being equal (namely assuming no change in capital market related changes).