Figure 19-8
-Refer to Figure 19-8.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 19-8

-Refer to Figure 19-8.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

After the shift in the demand curve, the new equilibrium exchange rate is shown at point B, which is above the pegged rate of $1.00/euro. As a result, there is an increase in the quantity demanded of euros, creating a shortage equivalent to the horizontal distance between the original demand curve and the new demand curve at the equilibrium exchange rate, which is equal to 800 million euros ($1.25 - $1.00 = $0.25, and $0.25 x 3.2 billion = 800 million). Therefore, choice C is the correct answer.

Figure 19-8 -Refer to Figure 19-8.The Equilibrium Exchange Rate Is at A,$1.25/euro.Suppose