Exhibit 35-4
Refer to Exhibit 35-4. Under a fixed exchange rate system, at the exchange rate of E₁, the peso is __________ and there is a __________.

Question

Exhibit 35-4 Refer to Exhibit 35-4. Under a fixed exchange rate system, at the exchange rate of E₁, the peso is __________ and there is a __________.

Quizplus · Accepted Answer

Under a fixed exchange rate system, the exchange rate is not determined by market forces but is fixed by authorities. The given exchange rate of E₁ in Exhibit 35-4 shows that the peso is overvalued, meaning its value is higher than what it should be in comparison to the dollar. As a result, there is a shortage of dollars because people will want to exchange their dollars for pesos at the fixed rate, and it may become difficult for the government to maintain this rate in the long run. Therefore, option C is the correct answer.

Exhibit 35-4 Refer to Exhibit 35-4. Under a Fixed Exchange Rate System