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. EXCHANGE RATE (Dollars per euro) 3.5 3.0 25 20 1.5 1.0 0.5 C 0 2 4 8 10 Supply Demand 6 QUANTITY OF EUROS (Billions) 12 14 16 10 Demand 1 Supply ◆ Flexible exchange rates * Fixed exchange rates On the 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 market reaches an equilibrium exchange rate of ? until the foreign exchange Now suppose that the United States wants to maintain the initial equilibrium exchange rate of $2 per euro. On the graph, use a grey point (star symbol) to indicate the new equilibrium under a system of fixed exchange rates. Sell dollars for euros in the foreign exchange market Increase income taxes in the United States Subsidize the production of cortain C 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.
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. EXCHANGE RATE (Dollars per euro) 3.5 3.0 25 20 1.5 1.0 0.5 C 0 2 4 8 10 Supply Demand 6 QUANTITY OF EUROS (Billions) 12 14 16 10 Demand 1 Supply ◆ Flexible exchange rates * Fixed exchange rates On the 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 market reaches an equilibrium exchange rate of ? until the foreign exchange Now suppose that the United States wants to maintain the initial equilibrium exchange rate of $2 per euro. On the graph, use a grey point (star symbol) to indicate the new equilibrium under a system of fixed exchange rates. Sell dollars for euros in the foreign exchange market Increase income taxes in the United States Subsidize the production of cortain C 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.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Unsure what points are for the flexible and fixed 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.
EXCHANGE RATE (Dollars per euro)
9223 22 22.
3.5
3.0
2.5
20
1.5
0.5
0
2
4
10
Supply
Demand
6
8
QUANTITY OF EUROS (Billions)
12
14
16
Demand
1
Supply
Flexible exchange rates
Fixed exchange rates
On the 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
market reaches an equilibrium exchange rate of
until the foreign exchange
Now suppose that the United States wants to maintain the initial equilibrium exchange rate of $2
per euro.
On the 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 dollars for euros in the foreign exchange market
Increase income taxes in the United States
Subsidize the production of certain U.S. exports to Europe
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