Figure 19-8
-Refer to Figure 19-8.The equilibrium exchange rate is originally 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.If the European Central Bank abandons the peg,the equilibrium exchange rate would be

Question

Figure 19-8

-Refer to Figure 19-8.The equilibrium exchange rate is originally 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.If the European Central Bank abandons the peg,the equilibrium exchange rate would be

Quizplus · Accepted Answer

If the European Central Bank pegs its currency at $1.00/euro, the equilibrium exchange rate would be at point A on the graph, where supply and demand intersect at $1.25/euro. However, if speculators expect the value of the euro to rise, the demand for euro will shift to the right, to D₂, causing an increase in the euro's value. Therefore, if the European Central Bank abandons the peg, the equilibrium exchange rate will be at the intersection of the supply and new demand curves, which is at point C, $1.50/euro.

Figure 19-8 -Refer to Figure 19-8.The Equilibrium Exchange Rate Is Originally at Is