Based on this figure, if an exchange rate of $0.09 dollars per Norwegian krone is maintained, the Norwegian government will gain (in dollar)________ worth of international reserves per period.
A)220
B)495
C)605
D)5,500

Question

Based on this figure, if an exchange rate of $0.09 dollars per Norwegian krone is maintained, the Norwegian government will gain (in dollar)________ worth of international reserves per period. 
A)220 
B)495 
C)605 
D)5,500

Quizplus · Accepted Answer

Since the official fixed exchange rate of 0.09 U.S. dollars per Krone is lower than the fundamental value of 0.11 U.S. dollars per Krone, the Krone is undervalued. Since the quantity of Krone demanded is 7,500 and the quantity supplied is only 2,000 Krone, the Norwegian governments must provide an additional 5,500 Krone by purchasing (increase)their international reserves. At the fixed exchange rate of $0.09 dollars per Norwegian krone, the Norwegian government will gain $495 ($0.09 × 5,500)per period in international reserves.

Based on This Figure, If an Exchange Rate of $0