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7. 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 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 2.5 2.0 1.5 1.0 0.5 0 0 2 4 6 1 8 12 QUANTITY OF EUROS (Billions) Supply 10 1 " 14 16 Demand ✓ Increase income taxes in the United States Supply Flexible exchange rates 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. Lower interest rates by way of monetary policy Fixed exchange rates Under a system of flexible exchange rates, the dollar will depreciate until the foreign exchange market reaches an equilibrium exchange rate of $2.5 per euro ▼ ? Now suppose that the United States wants to maintain the initial equilibrium exchange rate of $2 per euro. Subsidize the production of certain U.S. exports to Europe 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.

7. 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 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 2.5 2.0 1.5 1.0 0.5 0 0 2 4 6 1 8 12 QUANTITY OF EUROS (Billions) Supply 10 1 " 14 16 Demand ✓ Increase income taxes in the United States Supply Flexible exchange rates 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. Lower interest rates by way of monetary policy Fixed exchange rates Under a system of flexible exchange rates, the dollar will depreciate until the foreign exchange market reaches an equilibrium exchange rate of $2.5 per euro ▼ ? Now suppose that the United States wants to maintain the initial equilibrium exchange rate of $2 per euro. Subsidize the production of certain U.S. exports to Europe 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.

Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
8th Edition
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter32: A Macroeconomic Theory Of The Open Economy
Section: Chapter Questions
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7. 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 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 2.5 2.0 1.5 1.0 0.5 0 02 | | 6 Supply 8 12 QUANTITY OF EUROS (Billions) 10 1 14 16 44:14 Demand Supply ✓ Increase income taxes in the United States Flexible exchange rates Fixed exchange rates 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. O Lower interest rates by way of monetary policy Subsidize the production of certain U.S. exports to Europe ? Under a system of flexible exchange rates, the dollar will depreciate until the foreign exchange market reaches an equilibrium exchange rate of $2.5 per euro ▼ 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.
Transcribed Image Text:7. 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 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 2.5 2.0 1.5 1.0 0.5 0 02 | | 6 Supply 8 12 QUANTITY OF EUROS (Billions) 10 1 14 16 44:14 Demand Supply ✓ Increase income taxes in the United States Flexible exchange rates Fixed exchange rates 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. O Lower interest rates by way of monetary policy Subsidize the production of certain U.S. exports to Europe ? Under a system of flexible exchange rates, the dollar will depreciate until the foreign exchange market reaches an equilibrium exchange rate of $2.5 per euro ▼ 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.
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