DOLLAR PRICE OF EUROS 1.0 0.5 Attempts 1.7 1.5 Keep the Highest 1.7/3 5. Balance of payments and the foreign exchange market The following graph shows the market for euros in terms of dollars. The market is initially in equilibrium at $2.00 per euro and 4 billion euros. Suppose an economic expansion in the United States leads to an increase in the incomes of American households, causing imports from Europe to rise. On the following graph, show the effect of an expansion in the United States that leads to an increase in American incomes. 00 40 3.5 Supply of Euros 3.0 Demand for Euros 0 0 1 2 3 6 7 B QUANTITY OF EUROS (Billions of euros) Demand for Euros IT Supply of Euros Under a system of flexible exchange rates, the dollar will until the foreign exchange market reaches an equilibrium exchange rate of $ per euro. Now suppose that the United States maintains a fixed exchange rate of $2.00 per euro. Which of the following U.S. government policies would keep the balance-of-payments deficit from driving the exchange rate to the new equilibrium level? Check all that apply. Lower interest rates by way of monetary policy. Sell U.S. euro reserves in the foreign exchange market. Reduce income taxes in the United States.
DOLLAR PRICE OF EUROS 1.0 0.5 Attempts 1.7 1.5 Keep the Highest 1.7/3 5. Balance of payments and the foreign exchange market The following graph shows the market for euros in terms of dollars. The market is initially in equilibrium at $2.00 per euro and 4 billion euros. Suppose an economic expansion in the United States leads to an increase in the incomes of American households, causing imports from Europe to rise. On the following graph, show the effect of an expansion in the United States that leads to an increase in American incomes. 00 40 3.5 Supply of Euros 3.0 Demand for Euros 0 0 1 2 3 6 7 B QUANTITY OF EUROS (Billions of euros) Demand for Euros IT Supply of Euros Under a system of flexible exchange rates, the dollar will until the foreign exchange market reaches an equilibrium exchange rate of $ per euro. Now suppose that the United States maintains a fixed exchange rate of $2.00 per euro. Which of the following U.S. government policies would keep the balance-of-payments deficit from driving the exchange rate to the new equilibrium level? Check all that apply. Lower interest rates by way of monetary policy. Sell U.S. euro reserves in the foreign exchange market. Reduce income taxes in the United States.
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Transcribed Image Text:DOLLAR PRICE OF EUROS
1.0
0.5
Attempts 1.7 1.5
Keep the Highest 1.7/3
5. Balance of payments and the foreign exchange market
The following graph shows the market for euros in terms of dollars. The market is initially in equilibrium at $2.00 per euro and 4 billion euros. Suppose
an economic expansion in the United States leads to an increase in the incomes of American households, causing imports from Europe to rise.
On the following graph, show the effect of an expansion in the United States that leads to an increase in American incomes.
00
40
3.5
Supply of Euros
3.0
Demand for Euros
0
0
1
2
3
6
7
B
QUANTITY OF EUROS (Billions of euros)
Demand for Euros
IT
Supply of Euros
Under a system of flexible exchange rates, the dollar will
until the foreign exchange market reaches an equilibrium exchange rate of
$
per euro.
Now suppose that the United States maintains a fixed exchange rate of $2.00 per euro. Which of the following U.S. government policies would keep
the balance-of-payments deficit from driving the exchange rate to the new equilibrium level? Check all that apply.
Lower interest rates by way of monetary policy.
Sell U.S. euro reserves in the foreign exchange market.
Reduce income taxes in the United States.
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