On the previous graph, use the purple point (diamond symbol) to indicate the new equilibrium exchange rate and quantity under a system of flexible exchange rates. Under a system of flexible exchange rates, the dollar will until the foreign exchange market reaches an equilibrium exchange rate of Now suppose that the United States expends a portion of its euro reserves to maintain the initial equilibrium exchange rate of $2 per euro. On the previous graph, use a grey point (star symbol) to indicate the new equilibrium under a system of fixed exchange rates. Under system of fixed exchange rates, which of the following policies could the U.S. government use to prevent the change in demand for euros from driving the exchange rate to the new equilibrium? Check all that apply. Sell U.S. euro reserves in the foreign exchange market Lower interest rates by way of monetary policy Place import restrictions on European goods

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Chapter1: Making Economics Decisions
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The following graph shows the market for euros, which is initially in equilibrium. 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, illustrate the effect of an economic expansion on the market for euros by shifting the appropriate curve or curves.
Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back
to its original position, just drag it a little farther.
EXCHANGE RATE (Dollars per euro)
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
02
4
6
||
8
12
QUANTITY OF EUROS (Billions)
Supply
10
Demand
14
16
Demand
Supply
Flexible exchange rates
Fixed exchange rates
(?)
Transcribed Image Text:The following graph shows the market for euros, which is initially in equilibrium. 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, illustrate the effect of an economic expansion on the market for euros by shifting the appropriate curve or curves. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. EXCHANGE RATE (Dollars per euro) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 02 4 6 || 8 12 QUANTITY OF EUROS (Billions) Supply 10 Demand 14 16 Demand Supply Flexible exchange rates Fixed exchange rates (?)
On the previous graph, use the purple point (diamond symbol) to indicate the new equilibrium exchange rate and quantity under a system of flexible
exchange rates.
Under a system of flexible exchange rates, the dollar will
until the foreign exchange market reaches an equilibrium exchange rate of
Now suppose that the United States expends a portion of its euro reserves to maintain the initial equilibrium exchange rate of $2 per euro.
On the previous graph, use a grey point (star symbol) to indicate the new equilibrium under a system of fixed exchange rates.
Under system of fixed exchange rates, which of the following policies could the U.S. government use to prevent the change in demand for euros from
driving the exchange rate to the new equilibrium? Check all that apply.
O Sell U.S. euro reserves in the foreign exchange market
O Lower interest rates by way of monetary policy
Place import restrictions on European goods
Transcribed Image Text:On the previous graph, use the purple point (diamond symbol) to indicate the new equilibrium exchange rate and quantity under a system of flexible exchange rates. Under a system of flexible exchange rates, the dollar will until the foreign exchange market reaches an equilibrium exchange rate of Now suppose that the United States expends a portion of its euro reserves to maintain the initial equilibrium exchange rate of $2 per euro. On the previous graph, use a grey point (star symbol) to indicate the new equilibrium under a system of fixed exchange rates. Under system of fixed exchange rates, which of the following policies could the U.S. government use to prevent the change in demand for euros from driving the exchange rate to the new equilibrium? Check all that apply. O Sell U.S. euro reserves in the foreign exchange market O Lower interest rates by way of monetary policy Place import restrictions on European goods
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