The figure below illustrates the market for Bahamian dollars, where the price of the Bahamian dollar isvalued in U.S. dollars. Assume that the Bahamian government wants to peg its currency to the U.S. dollar ata 1:1 ratio (one U.S. dollar = one Bahamian dollar). But the current exchange rate is at 90 cents (10 centsbelow the official peg).What must the Bahamian central bank do to return to the $1 exchange rateA. It would need to reduce the demand for the Bahamlan dollar.B. It would need to reduce the supply of the Bahamian dollar.C. It would need to Increase the supply of the Bahamian dollar.D. It would need to Increase the demand for the Bahamlan dollar.Part 2Suppose you are a U.S. student and are thinking about visiting the Bahamas for spring break. You wouldrather the central bank intervened ___ (before or after) spring break.Part 3Suppose that currently, the exchange rate is 1 Bahamian dollar for 1 U.S. dollar. The price of a Big Mac is $5in the United States and 3.00 in the Bahamas. If purchasing power parity (PPP) is held exactly, theexchange rate should be ___ Bahamian dollars per U.S. dollar (round your answer to two decimal places).

Part 1: What must the Bahamian central bank do to return to the $1 exchange rate?ScenarioThe…

Answered: The figure below illustrates the market…

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter11: Foreign Exchange, Trade, And Bubbles

Section: Chapter Questions

Problem 6MC

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