The figure given below shows the demand curves for dollars arising out of Thai demand for U.S. goods and services and the supply of dollars arising out of the U.S. demand for Thai goods, services, and financial assets. D1 and S1 are the original demand and supply curves.
Figure 18.2

-Assume that the foreign exchange market is initially at equilibrium when the demand and supply curves are D1 and S1 respectively. When the demand curve shifts from D1 to D2, the Thai government intervenes to restore the original equilibrium. If Figure 18.2 describes these changes, which of the following will be true?
A) The baht depreciates slightly, as the equilibrium exchange rate goes down from E to F.
B) The baht depreciates, as the equilibrium exchange rate goes up from E to G.
C) The baht appreciates, as the equilibrium exchange rate goes down from E to D.
D) The equilibrium exchange rate goes up from D to G.
E) The baht appreciates slightly, as the equilibrium exchange rate goes up from E to F.

Question

The figure given below shows the demand curves for dollars arising out of Thai demand for U.S. goods and services and the supply of dollars arising out of the U.S. demand for Thai goods, services, and financial assets. D1 and S1 are the original demand and supply curves.
Figure 18.2
 
-Assume that the foreign exchange market is initially at equilibrium when the demand and supply curves are D1 and S1 respectively. When the demand curve shifts from D1 to D2, the Thai government intervenes to restore the original equilibrium. If Figure 18.2 describes these changes, which of the following will be true?
A) The baht depreciates slightly, as the equilibrium exchange rate goes down from E to F. 
B) The baht depreciates, as the equilibrium exchange rate goes up from E to G. 
C) The baht appreciates, as the equilibrium exchange rate goes down from E to D. 
D) The equilibrium exchange rate goes up from D to G. 
E) The baht appreciates slightly, as the equilibrium exchange rate goes up from E to F.

Quizplus · Accepted Answer

When the demand curve shifts from D1 to D2, the equilibrium exchange rate will increase from E to G. However, the Thai government intervenes to restore the original equilibrium, which means they must increase the supply of baht. This will cause the exchange rate to depreciate slightly from G to F, resulting in answer choice A.

The Figure Given Below Shows the Demand Curves for Dollars