Chapter 43, Problem 1FRQ

a)

To determine

To find:

Graphical representation of the foreign exchange market for U.S. dollars showing the equilibrium in the market.

Explanation of Solution

  

Economics Concept Introduction

Introduction:

Exchange rate is the rate of conversion of one currency into another. This is usually determined for the trading of goods and services with one country and the rest of the world.

b)

To determine

To find:

Whether the fixed exchange rate leads to a shortage or surplus of U.S. dollars.

Explanation of Solution

  

The fixed exchange rate will lead to a surplus of dollars.

Economics Concept Introduction

Introduction:

Exchange rate is the rate of conversion of one currency into another. This is usually determined for the trading of goods and services with one country and the rest of the world.

c)

To determine

To find:

Whether the U.S. government needs to buy or sell dollars, show the graphical representation.

Explanation of Solution

  

To bring the foreign exchange market to an equilibrium at a fixed exchange rate, the country U must withdraw dollars from the market to reduce the supply of dollars. In other words, the country U must withdraw dollars from the foreign exchange market.

Economics Concept Introduction

Introduction:

Exchange rate is the rate of conversion of one currency into another. This is usually determined for the trading of goods and services with one country and the rest of the world.