5. Fixed exchange rates Consider the exchange rate between the Moroccan dirham a

Question

5. Fixed exchange rates

Consider the exchange rate between the Moroccan dirham and the euro. Suppose the Moroccan government and the Eurozone governments agree to fix the exchange rate (ER) at 2.5 dirham per euro, as shown by the grey line on the following graph.

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

At the official exchange rate of 2.5 dirham per euro, the euro is (overvalued/undervalued), and the Moroccan dirham is (overvalued/undervalued) , which means that Moroccans pay (less/more) for European exports than they would with a free-floating exchange rate.

At the official dirham price of euros, there is a (surplus/shortage) of euros in the foreign exchange market.

Suppose the governments in the Eurozone and Morocco agree to change the official exchange rate from 2.5 dirham per euro to 2 dirham per euro. The action represents a (devaluation/revaluation) of the euro and a (devaluation/revaluation) of the dirham.

4.0 T 3.5 3.0 Supply of Euros ER E 2.5 2.0 Demand for Euros w 1.5 C3 E1.0 1.0 C3 0.5 0 2 46 8 10 1 14 16 QUANTITY OF EUROS (Billions)

Explanation / Answer

Answer.

Blan 1 - Overvalued (The Moroccans are paying more for every Euro. Even though the equilibrium rate is 2 dirham for one euro).

Blank 2- Undervalued.

Blank 3- Morocans are paying more.

Blank 4- At 2.5 Dirhams for one Euro, there will be excess supply of Euros, as they will receive high prices for every euro they sell in the foreign exchange market.

Blank 5- Devaluation of Euro (Earlier, for 1 euro, they were receivng 2.5 Dirhams, now they receive only 2 Dirhams)

Blank 6- Revaluation of Dirham.

Related Questions

Navigate

• Browse (All)
• Browse 5
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.