The following graph shows the market for euros, which is initially in equilibrium. 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, illustrate the effect of an economic expansion on the market for euros by shifting the appropriate curve or curves. ? (Dollars per euro) 40 3.5 3.0 25 Supply Demand Supply
The following graph shows the market for euros, which is initially in equilibrium. 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, illustrate the effect of an economic expansion on the market for euros by shifting the appropriate curve or curves. ? (Dollars per euro) 40 3.5 3.0 25 Supply Demand Supply
Economics (MindTap Course List)
13th Edition
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Roger A. Arnold
Chapter34: International Finance
Section34.3: Fixed Exchange Rates
Problem 3ST
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Transcribed Image Text:The following graph shows the market for euros, which is initially in equilibrium. 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, illustrate the effect of an economic expansion on the market for euros by shifting the appropriate curve or curves.
?
EXCHANGE RATE (Dollars per euro)
4.0
3.5
3.0
25
2.0
1.5
1.0
05
0
02
Supply
Demand
6 8 10 12
QUANTITY OF EUROS (Billions)
14
16
Demand
Supply
Flexible exchange rates
Fixed exchange rates
Transcribed Image Text:On the graph, use the purple point (diamond symbol) to indicate the new equilibrium exchange rate and quantity under a system of flexible exchange
rates.
Under a system of flexible exchange rates, the dollar will
of
Now suppose that the United States wants to maintain the initial equilibrium exchange rate of $2 per euro.
On the graph, use a grey point (star symbol) to indicate the new equilibrium under a system of fixed exchange rates.
Under system of fixed exchange rates, which of the following policies could the U.S. government use to prevent the change in demand for euros from
driving the exchange rate to the new equilibrium? Check all that apply.
Subsidize the production of certain U.S. exports to Europe
until the foreign exchange market reaches an equilibrium exchange rate
Increase income taxes in the United States
Sell dollars for euros in the foreign exchange market
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