Based on this figure, in order to maintain an exchange rate of $0.15 dollars per Norwegian krone, the Norwegian government will have to spend (in dollars)_____ worth of international reserves per period.

A)$300
B)$2,000
C)$825
D)$5,500

Question

Based on this figure, in order to maintain an exchange rate of $0.15 dollars per Norwegian krone, the Norwegian government will have to spend (in dollars) _____ worth of international reserves per period.

A)$300 
B)$2,000 
C)$825 
D)$5,500

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 demanded is 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. At the fixed exchange rate of $0.15 dollars per Norwegian krone, the Norwegian government will have to spend $825 ($0.15 × 5,500)per period.

Based on This Figure, in Order to Maintain an Exchange