Based on this figure, if the official value of krone is fixed at $0.09 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 value of krone is fixed at $0.09 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 0.09 U.S. dollars per Krone is lower than the fundamental value of the nominal exchange rate of 0.11 U.S. dollars per Krone, the Krone is undervalued. With the quantity of Krone demand being 7,500 and the quantity supplied being 2,000 Krone, the Norwegian governments must supply the remaining 5,500 Krone by purchasing (increase)their international reserves by 5,500 Krone per period.

Based on This Figure, If the Official Value of Krone