Based on this figure, if the official fixed value of krone is fixed at $0.15 per krone, then the Norwegian krone is ________ and the international reserves of Norway will ________ krone per period.
A)undervalued; increase by 2,000
B)overvalued; decrease by 5,500
C)undervalued; increase by 5,500
D)overvalued; decrease by 2,000

Question

Based on this figure, if the official fixed value of krone is fixed at $0.15 per krone, then the Norwegian krone is ________ and the international reserves of Norway will ________ krone per period. 
A)undervalued; increase by 2,000 
B)overvalued; decrease by 5,500 
C)undervalued; increase by 5,500 
D)overvalued; decrease by 2,000

Quizplus · Accepted Answer

Since the official fixed exchange rate of 0.15 U.S. dollars per Krone is higher than the fundamental value of 0.11 U.S. dollars per Krone, the Krone is overvalued. Since the quantity of Krone demand 2,000 and the quantity supplied is 7,500 Krone, the Norwegian governments must purchase the excess 5,500 Krone by spending down (decrease)their international reserves by 5,500 Krone per period.

Based on This Figure, If the Official Fixed Value of Krone