The following graph shows the market for euros, which is initially in equilibrium. Suppose an economic downturn in the United States leads to a drop American incomes, causing imports from Europe to decline. On the graph, illustrate the effect of an economic downturn on the market for euros by shifting the appropriate curve or curves. EXCHANGE RATE (Dollars per euro) 2.00 1.75 1.50 1.25 1.00 0.75 0.25 0 1 2 Supply 5 6 QUANTITY OF EUROS (Billions) 7 Inder a system of flexible exchange rates, the dollar will Demand On the graph, use the purple point (diamond symbol) to indicate the new equilibrium exchange rate and quantity under a system of flexible exchange Lower interest rates by way of monetary policy Reduce income taxes in the United States Supply Flexible exchange rates Sell U.S. euro reserves in the foreign exchange market Fixed exchange rates low suppose that the United States wants to maintain the initial equilibrium exchange rate of $1 per euro. on the graph, use a grey point (star symbol) to indicate the new equilibrium under a system of fixed exchange rates. Inder 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 riving the exchange rate to the new equilibrium? Check all that apply. until the foreign exchange market reaches an equilibrium exchange rate of
The following graph shows the market for euros, which is initially in equilibrium. Suppose an economic downturn in the United States leads to a drop American incomes, causing imports from Europe to decline. On the graph, illustrate the effect of an economic downturn on the market for euros by shifting the appropriate curve or curves. EXCHANGE RATE (Dollars per euro) 2.00 1.75 1.50 1.25 1.00 0.75 0.25 0 1 2 Supply 5 6 QUANTITY OF EUROS (Billions) 7 Inder a system of flexible exchange rates, the dollar will Demand On the graph, use the purple point (diamond symbol) to indicate the new equilibrium exchange rate and quantity under a system of flexible exchange Lower interest rates by way of monetary policy Reduce income taxes in the United States Supply Flexible exchange rates Sell U.S. euro reserves in the foreign exchange market Fixed exchange rates low suppose that the United States wants to maintain the initial equilibrium exchange rate of $1 per euro. on the graph, use a grey point (star symbol) to indicate the new equilibrium under a system of fixed exchange rates. Inder 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 riving the exchange rate to the new equilibrium? Check all that apply. until the foreign exchange market reaches an equilibrium exchange rate of
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:7. Balance of payments and the foreign exchange market
The following graph shows the market for euros, which is initially in equilibrium. Suppose an economic downturn in the United States leads to a drop
in American incomes, causing imports from Europe to decline.
On the graph, illustrate the effect of an economic downturn on the market for euros by shifting the appropriate curve or curves.
?
EXCHANGE RATE (Dollars per euro)
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0
1
2
Supply
Demand
QUANTITY OF EUROS (Billions)
7
8
Demand
Supply
Flexible exchange rates
Lower interest rates by way of monetary policy
Reduce income taxes in the United States
Sell U.S. euro reserves in the foreign exchange market
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
until the foreign exchange market reaches an equilibrium exchange rate of
Now suppose that the United States wants to maintain the initial equilibrium exchange rate of $1 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.
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