Exchange-rate overshooting e following graph shows the short-run supply schedule (Sp) and demand schedule (Do) for the Mexican peso. S₁ denotes the long-run supply hedule of pesos. The initial equilibrium exchange rate is $1.20 per peso. uppose that the demand for pesos increases to D₁. the graph, use the tan point (dash symbol) to indicate the short-run equilibrium exchange rate. Then use the grey point (star symbol) to indicate e long-run equilibrium exchange rate. ote: Dashed drop lines will automatically extend to both axes. 3.0 2.7 24 2.1 1.8 1.5 1.2 0.9 0.6 03 0 0 25 50 50 o 75 100 125 150 175 200 225 250 QUANTITY (Pesos) Short-Run Equilibrium Long-Run Equilibrium ?

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4. Exchange-rate overshooting
The following graph shows the short-run supply schedule (So) and demand schedule (Do) for the Mexican peso. S₁ denotes the long-run supply
schedule of pesos. The initial equilibrium exchange rate is $1.20 per peso.
Suppose that the demand for pesos increases to D₁.
On the graph, use the tan point (dash symbol) to indicate the short-run equilibrium exchange rate. Then use the grey point (star symbol) to indicate
the long-run equilibrium exchange rate.
Note: Dashed drop lines will automatically extend to both axes.
EXCHANGE RATE (Dollars per peso)
3.0
2.7
24
2.1
1.8
0.9
0.6
0.3
0
0 25 50
Step
1.
2.
3.
0°
$0
S₂
75 100 125 150 175 200 225 250
QUANTITY (Pesos)
Short-Run Equilibrium
Referring to the previous graph, use the dropdown menus in the following table to show the order of the events that led to the long-run equilibrium
exchange rate.
Event
Long-Run Equilibrium
Transcribed Image Text:4. Exchange-rate overshooting The following graph shows the short-run supply schedule (So) and demand schedule (Do) for the Mexican peso. S₁ denotes the long-run supply schedule of pesos. The initial equilibrium exchange rate is $1.20 per peso. Suppose that the demand for pesos increases to D₁. On the graph, use the tan point (dash symbol) to indicate the short-run equilibrium exchange rate. Then use the grey point (star symbol) to indicate the long-run equilibrium exchange rate. Note: Dashed drop lines will automatically extend to both axes. EXCHANGE RATE (Dollars per peso) 3.0 2.7 24 2.1 1.8 0.9 0.6 0.3 0 0 25 50 Step 1. 2. 3. 0° $0 S₂ 75 100 125 150 175 200 225 250 QUANTITY (Pesos) Short-Run Equilibrium Referring to the previous graph, use the dropdown menus in the following table to show the order of the events that led to the long-run equilibrium exchange rate. Event Long-Run Equilibrium
Referring
exchange
Step
1.
2.
3.
5.
The Mexican price of U.S. exports decreases, and the quantity of U.S. exports demanded increases.
The quantity of pesos supplied increases.
The dollar depreciates to $2.10 per peso.
The supply schedule of pesos becomes more elastic, as shown by S₁.
The dollar appreciates to $1.50 per peso.
that led to the long
Transcribed Image Text:Referring exchange Step 1. 2. 3. 5. The Mexican price of U.S. exports decreases, and the quantity of U.S. exports demanded increases. The quantity of pesos supplied increases. The dollar depreciates to $2.10 per peso. The supply schedule of pesos becomes more elastic, as shown by S₁. The dollar appreciates to $1.50 per peso. that led to the long
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