Refer to the following graph when answering the questions that follow. At the of

Question

Refer to the following graph when answering the questions that follow. At the official exchange rate of 1.25 ringgit per euro, the euro is Malaysians pay for European exports than they would with a free-floating exchange rate. On the graph, use the purple point (diamond symbol) to indicate the new equilibrium exchange rate and quantity under a system of flexible exchange Under a system of flexible exchange rates, the dollar will until the foreign exchange market reaches an equilibrium exchange rate of Now suppose that the United States wants to maintain the initial equilibrium exchange rate of $1 per euro. On the graph, use a grey point (star symbol) to indicate the new equilibrium under a system of fixed exchange rates. Under system of fixed exchange rates, which of the following policies could the U.S. government use to prevent the change in demand for euros from driving the exchange rate to the new equilibrium? Check all that apply. Place import restrictions on European goods Sell U.S. euro reserves in the foreign exchange market Lower interest rates by way of monetary policy

Explanation / Answer

1. At er 1.25 , euro is overvalued , rangit is undervalued

2. Pay More

3. Depreciates , till it reaches er of 1 .

4. Sell u.s reserves of Euro in the foriegn market

Lower interest rates by way of monetary policy

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