1. If Thailand wants to maintain a fixed exchange rate of two baht per euro, it
ID: 1206530 • Letter: 1
Question
1. If Thailand wants to maintain a fixed exchange rate of two baht per euro, it should ____( sell/buy) euros in the foreign exchange market. To be successful, this policy would have to ______( increase the supply of/ decrease the supply of/ increased the demand for/ decrease the demand for) euros by ___ billion euros at any given exchange rate.2. In this type of situation, a speculative attack may occur if investors believe which of the following statements? A. Thailand is running out of euro reserves. B. The demand for Thai goods is going to dramatically increase. C. Thai assets are soon going to increase in value.
3. True or false: in the event of a successful speculative attack, Thai businesses tend to suffer because their foreign debt will now cost more to repay. EXCHANGE RATE (Baht per eurol 6.0 3.5 3.0 2.5 S1 1.5 1.0 0.5 0.0 0 4 8 12 16 20 24 28 32 QUANTITY OF EUROS (Billions)
Explanation / Answer
1. If Thailand wants to maintain a fixed exchange rate of two baht per euro, it should sell euros in the foreign exchange market. To be successful, this policy would have to decrease the demand for euros by 8 billion euros at any given exchange rate.
2. The correct answer is option A: Thailand is running out of Euro Reserves.
A speculative attack happens when both domestic and foreign investors involve in a massive selling of a country's currency assets.
3. The given statement is true since in order to maintain the foreign exchange rate the Thailand Government would have sold all the reserves and in the long term the country would not be able to sustain the high interest rates which it might offer for its own currency, as a result of which the value of Thai Baht might fall further.
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