Blank #1 appreciate or
Blank #2 $2 per euro, $1.5 per euro, or $2.5 per euro
Transcribed Image Text:On the previous graph, use the purple point (diamond symbol) to indicate the new equilibrium exchange rate and quantity under a system of flexible
exchange rates.
Under a system of flexible exchange rates, the dollar will
Now suppose that the United States expends a portion of its euro reserves to maintain the initial equilibrium exchange rate of $2 per euro.
On the previous graph, use a grey point (star symbol) to indicate the new equilibrium under a system of fixed exchange rates.
until the foreign exchange market reaches an equilibrium exchange rate of
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.
Lower interest rates by way of monetary policy
Increase income taxes in the United States
Sell dollars for euros in the foreign exchange market
exchange rates.
Under a system of flexible exchange rates, the dollar will
Now suppose that the United States expends a portion of its euro reserves to maintain the initial equilibrium exchange rate of $2 per euro.
On the previous graph, use a grey point (star symbol) to indicate the new equilibrium under a system of fixed exchange rates.
until the foreign exchange market reaches an equilibrium exchange rate of
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.
Lower interest rates by way of monetary policy
Increase income taxes in the United States
Sell dollars for euros in the foreign exchange market
Transcribed Image Text:6. Balance of payments and the foreign exchange market
The following graph shows the market for euros, which is initially in equilibrium. Suppose an economic downturn in the United States leads to a drop
in American incomes, causing imports from Europe to decline.
On the graph, illustrate the effect of an economic downturn on the market for euros by shifting the appropriate curve or curves.
Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back
to its original position, just drag it a little farther.
EXCHANGE RATE (Dollars per euro)
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
0
8
12
24
QUANTITY OF EUROS (Billions)
16
Supply
20
Demand
28
32
Demand
Supply
Flexible exchange rates
Fixed exchange rates
(?)
The following graph shows the market for euros, which is initially in equilibrium. Suppose an economic downturn in the United States leads to a drop
in American incomes, causing imports from Europe to decline.
On the graph, illustrate the effect of an economic downturn on the market for euros by shifting the appropriate curve or curves.
Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back
to its original position, just drag it a little farther.
EXCHANGE RATE (Dollars per euro)
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
0
8
12
24
QUANTITY OF EUROS (Billions)
16
Supply
20
Demand
28
32
Demand
Supply
Flexible exchange rates
Fixed exchange rates
(?)
