Answered: On the graph, show the effect of an…

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter29: Exchange Rates And International Capital Flows

Section: Chapter Questions

Problem 25CTQ: If a countrys currency is expected to appreciate in value, what would you think will be the impact...

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5. Balance of payments and the foreign exchange market

The following graph shows the market for euros in terms of dollars. The market is initially in equilibrium at $1.00 per euro and 4 billion euros. Suppose an economic expansion in the United States leads to an increase in the incomes of American households, causing imports from Europe to rise.

On the graph, show the effect of an expansion in the United States that leads to an increase in American incomes.

DOLLAR PRICE OF EUROS
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0
0
Supply of Euros
1
Demand for Euros
4
5
2 3
6
QUANTITY OF EUROS (Billions of euros)
7
8
Under a system of flexible exchange rates, the dollar will
exchange rate of $
per euro.
Demand for Euros
Supply of Euros
until the foreign exchange market reaches an equilibrium

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