Refer to Figure 19-8. The equilibrium exchange rate is at A, 1.25/euro. Suppose the European Central Bank pegs its currency at 1.00/euro. Speculators expect that the value of the euro will rise and this shifts the demand curve for euro to D2.
After the shift,
A) there is a surplus of euros equal to 400 million.
B) there is a surplus of euros equal to 500 million.
C) there is a shortage of euros equal to 800 million.
D) there is a shortage of euros equal to 1,000 million.
Question 2
If people assume that future rates of inflation will ________, they are said to have adaptive expectations.
A) not be related to inflation rates of the past B) follow the pattern of inflation rates in the past
C) be higher than inflation rates of the past D) be lower than inflation rates of the past
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