Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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d) What policy would help the developing country maintain its fixed exchange rate?

Transcribed Image Text:O An increase in interest rates in the United States
O U.S. consumer expectations that future prices will increase in the developing nation
O Increased preferences of new dollar holders for U.S. goods and services
O An increase in income among those holding new dollars
b. If exchange rates are flexible, how does the change in demand affect the value of new dollars?
O New dollars depreciate relative to the U.S. dollar.
O New dollars appreciate relative to the U.S. dollar.
Suppose the developing country has decided to peg its currency (new dollar) to the U.S. dollar at exchange rate ee.
c. With the new demand for new dollars, how must the developing nation adjust the market to maintain the fixed exchange rate?
O Decrease the supply of new dollars
O Increase the supply of new dollars
O Increase the demand for new dollars
d. What policy(s) would help the developing country maintain its fixed exchange rate?
Instructions: In order to receive full credit, you must make a selection for each option. For correct answer(s), click the box once to
place a check mark. For incorrect answer(s), click the option twice to empty the box.
Enact contractionary monetary policy
? Purchase foreign reserves with new dollars
? Enact expansionary monetary policy
? Purchase new dollars with foreign reserves

Transcribed Image Text:In examining the market for new dollars, a currency used in a developing country, you notice an increase in demand for new dollars
relative to U.S. dollars. The demand for new dollars increases from D to D1
New Dollars
S
ces
D,
Q1
Quantity (new dollars)
a. Which of the following events likely caused the increase in demand for new dollars?
< Prev
9 of 13
Next >
nere to search
Exchange Rate (USD/new dollar)
出
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