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The following graph shows the market for euros, which is initially in equilibrium. Suppose an economic expansion in Canada leads to an increase in the incomes of Canadian 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. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther.

The following graph shows the market for euros, which is initially in equilibrium. Suppose an economic expansion in Canada leads to an increase in the incomes of Canadian 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. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther.

Brief Principles of Macroeconomics (MindTap Course List)
Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter13: Open-economy Macroeconomics: Basic Concepts
Section: Chapter Questions
Problem 6PA
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On the previous 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 appreciate until the foreign exchange market reaches an equilibrium exchange rate of $1 per euro Now suppose that Canada wants to maintain the initial equilibrium exchange rate of $1 per euro. On the previous graph, use a grey point (star symbol) to indicate the new equilibrium under a system of fixed exchange rates. Under a system of fixed exchange rates, which of the following policies could the Canadian government use to prevent the change in demand for euros from driving the exchange rate to the new equilibrium? Check all that apply. ✓ Reduce income taxes in Canada ✓ Place import restrictions on European goods Lower interest rates by way of monetary policy
Transcribed Image Text:On the previous 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 appreciate until the foreign exchange market reaches an equilibrium exchange rate of $1 per euro Now suppose that Canada wants to maintain the initial equilibrium exchange rate of $1 per euro. On the previous graph, use a grey point (star symbol) to indicate the new equilibrium under a system of fixed exchange rates. Under a system of fixed exchange rates, which of the following policies could the Canadian government use to prevent the change in demand for euros from driving the exchange rate to the new equilibrium? Check all that apply. ✓ Reduce income taxes in Canada ✓ Place import restrictions on European goods Lower interest rates by way of monetary policy
5. Balance of payments and the foreign exchange market The following graph shows the market for euros, which is initially in equilibrium. Suppose an economic expansion in Canada leads to an increase in the incomes of Canadian 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. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. EXCHANGE RATE (Dollars per euro) Supply 1.25 XXX 1.00 0.75 2.00 1.75 1.50 0.50 0.25 0 Demand Supply Flexible exchange rates Fixed exchange rates (?)
Transcribed Image Text:5. Balance of payments and the foreign exchange market The following graph shows the market for euros, which is initially in equilibrium. Suppose an economic expansion in Canada leads to an increase in the incomes of Canadian 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. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. EXCHANGE RATE (Dollars per euro) Supply 1.25 XXX 1.00 0.75 2.00 1.75 1.50 0.50 0.25 0 Demand Supply Flexible exchange rates Fixed exchange rates (?)
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