Answered: On the graph, show the effect of an…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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 $1.00 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 graph, show the effect of an expansion in the United States that leads to an increase in American incomes.

DOLLAR PRICE OF EUROS
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0
0
Supply of Euros
1
Demand for Euros
4
5
2 3
6
QUANTITY OF EUROS (Billions of euros)
7
8
Under a system of flexible exchange rates, the dollar will
exchange rate of $
per euro.
Demand for Euros
Supply of Euros
until the foreign exchange market reaches an equilibrium

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