Figure 30-4

-Refer to Figure 30-4.The equilibrium exchange rate is at A,$1.25/euro.Suppose the European Central Bank pegs its currency at $1.00/euro.Speculators expect that the value of the euro will rise and this shifts the demand curve for euro to D₂. After the shift,

Question

Figure 30-4
 
-Refer to Figure 30-4.The equilibrium exchange rate is at A,$1.25/euro.Suppose the European Central Bank pegs its currency at $1.00/euro.Speculators expect that the value of the euro will rise and this shifts the demand curve for euro to D₂. After the shift,

Quizplus · Accepted Answer

The shift in the demand curve from D₁ to D₂ indicates an increase in demand for euros. However, since the ECB is pegging the euro at a lower rate than the equilibrium exchange rate (A), there will be excess demand for euros (i.e., a shortage of euros) at the pegged rate of $1.00/euro. The amount of shortage will be the vertical distance between the demand curve D₂ and the supply curve at the pegged rate ($1.00/euro) corresponding to point B, which is approximately 800 million euros ($800 million = 0.8 x 1 billion euros).

Figure 30-4 -Refer to Figure 30-4.The Equilibrium Exchange Rate Is at A,$1.25/euro.Suppose