At the official exchange rate of 2.5 dirham per euro, the euro isand the Moroccan dirham isthat Moroccans pay for European exports than they would with a free-floating exchange rate.At the official dirham price of euros, there is aof euros in the foreign exchange market.which meansSuppose the governments of the Eurozone and Morocco reevaluate their currencies so that their official exchange rate is now 1 dirham per 1 euro.This action results inof the euro. 4. Fixed exchange ratesConsider the exchange rate between the Moroccan dirham and the euro. Suppose the Moroccan government and the Eurozone governments agree tofix the exchange rate (ER) at 2.5 dirham per euro, as shown by the grey line on the following graph.Refer to the following graph when answering the questions that follow.EXCHANGE RATE (Dirham per euro)4.03530252015100.502Supply of EurosÉRDemand for Euros41012QUANTITY OF EUROS (Billions)14

The exchange rate refers to the value of one country's currency to another country's currency. Generally, it is the rate at which another currency can be exchanged for a common good like international trade.At the equilibrium point, the value of the 1 Euro is 2 dirhamsAt the official exchange rate of 2.5 dirhams, the value of the 1 Euro is 2.5 dirhamsWith the fixed exchange rate of 2.5 dirhams, more dirhams can be purchased from 1 Euro. Thus, the Euro is overvalued. At the equilibrium point, the value of the 1 dirham is At the official exchange rate of 2.5, the value of the 1 dirham is With the fixed exchange rate of 2.5, a few euros can be purchased for 1 dirham. Thus, the Moroccan dirham is undervalued. Since the value of the dirham is depreciating implies that Moroccans need to spend more dirhams to purchase the same basket of goods from the European market that they were purchasing at the equilibrium exchange rate. Therefore, European exports become more expensive for the Moroccans at the official exchange rate of 2.5. At the official exchange rate, the demand for euros is 3 billion and the supply of euros is 13 billion. The supply of euros is more than the demand for euros. Thus, there is a surplus of euros in the foreign exchange market.The revaluation of currency led to an official exchange rate of 1 dirham per euro. Now the value of 1 Euro is 1 dirham, which implies that initially in exchange for 1 Euro one will get 2.5 dirhams but now they will only get 1 dirham. Thus, the dirham becomes more expensive in relation to the euro. Therefore, the euro is devaluedFinal answer givenAt the official exchange rate of 2.5 dirhams per euro, the euro is overvalued and the Moroccan dirham is which means undervalued, that Moroccans pay more for European exports than they would with a free-floating exchange rate.At the official dirham price of euros, there is a surplus of euros in the foreign exchange market.Suppose the governments in the Eurozone and Morocco agree to change the official exchange rate from 2.5 dirhams per euro to 1 dirhams per euro. The action results in the devaluation of the euro

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At the official exchange rate of 2.5 dirham per euro, the euro is and the Moroccan dirham is that Moroccans pay for European exports than they would with a free-floating exchange rate. which means At the official dirham price of euros, there is a of euros in the foreign exchange market. Suppose the governments of the Eurozone and Morocco reevaluate their currencies so that their official exchange rate is now 1 dirham per 1 euro. This action results in of the euro.

At the official exchange rate of 2.5 dirham per euro, the euro is and the Moroccan dirham is that Moroccans pay for European exports than they would with a free-floating exchange rate. which means At the official dirham price of euros, there is a of euros in the foreign exchange market. Suppose the governments of the Eurozone and Morocco reevaluate their currencies so that their official exchange rate is now 1 dirham per 1 euro. This action results in of the euro.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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