**Graph Explanation:**The graph displays the foreign exchange market for the Brazilian Real. The vertical axis represents the exchange rate in cents per Real, ranging from 20 to 40 cents. The horizontal axis indicates the quantity of Reals traded for dollars, in billions, from 9 to 17 billion.Key features of the graph:- **Supply Curve (S):** Upward sloping, indicating a direct relationship between the exchange rate and the quantity supplied of Reals.- **Demand Curve (D):** Downward sloping, showing an inverse relationship between the exchange rate and the quantity demanded of Reals.- **Equilibrium Point (Eo):** The intersection of the supply and demand curves at an exchange rate of 35 cents per Real and a quantity of 13 billion Reals.- **Pegged Rate:** Below the equilibrium at 30 cents per Real.**Text Explanation:**In the above graph, the central bank of Brazil aims to peg the Real to 30 cents per Real. The peg is below the market equilibrium (Eo). Assume the central bank wants to restore the peg by directly intervening in the foreign exchange market. What should the central bank do? Explain your answer. To restore the peg at 30 cents per Real, the central bank could increase the supply of Reals in the market, shifting the supply curve to the right, or buy dollars from the market, reducing the exchange rate to the desired peg.

Cents/Real 40 35 30 25 20 9 15 S 11 13 17 Q Q₂ Billions of Reals Traded for Dollars (a) Pegging an exchange rate below equilibrium D In the above graph the central bank of Brazil aims to peg the Real to 30 cents per Real. The peg now is below market equilibrium (Eo). Assume the central bank wants to restore the peg by directly intervening in the foreign exchange market. What should the central bank do? Explain your answer.

Cents/Real 40 35 30 25 20 9 15 S 11 13 17 Q Q₂ Billions of Reals Traded for Dollars (a) Pegging an exchange rate below equilibrium D In the above graph the central bank of Brazil aims to peg the Real to 30 cents per Real. The peg now is below market equilibrium (Eo). Assume the central bank wants to restore the peg by directly intervening in the foreign exchange market. What should the central bank do? Explain your answer.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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