Question 1
Figure 19-8
Refer to Figure 19-8. The equilibrium exchange rate is originally 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 D
2. If the European Central Bank abandons the peg, the equilibrium exchange rate would be
◦ $1.00/euro.
◦ $1.25/euro.
◦ $1.50/euro.
◦ $1.75/euro.
Question 2
Figure 19-10
Refer to Figure 19-10. Under the Bretton Woods System of exchange rates, if the par exchange rate was $4 per pound in the figure above, then which of the following is true?
◦ The Bank of England would have to buy 0.7 million pounds per day with dollars.
◦ There is a shortage of pounds equal to 0.7 million.
◦ The Bank of England would have to sell 0.7 million pounds per day in exchange for dollars.
◦ The par exchange rate is below the equilibrium rate, causing a shortage of domestic currency.
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