The diagram below shows the market for foreign exchange from the perspective of Canada.The demand for foreign exchange is and the supply of foreign exchange varies between and ,with an average of . FIGURE 34-4
-Refer to Figure 34-4.Suppose the Bank of Canada pegs the exchange rate at and the supply curve is .The Bank would have to ________ foreign exchange in the amount of ________ per month.

Question

The diagram below shows the market for foreign exchange from the perspective of Canada.The demand for foreign exchange is  and the supply of foreign exchange varies between  and  ,with an average of  .  FIGURE 34-4
-Refer to Figure 34-4.Suppose the Bank of Canada pegs the exchange rate at  and the supply curve is  .The Bank would have to ________ foreign exchange in the amount of ________ per month.

Quizplus · Accepted Answer

Since the exchange rate is pegged above the equilibrium exchange rate, there will be excess demand for foreign exchange in Canada. To maintain the pegged exchange rate, the Bank of Canada would need to supply the market with the amount of currency demanded by the market participants, which is equal to the difference between the demand and supply at the pegged exchange rate.

From the graph, we can see that at the pegged exchange rate of 0.80 Canadian dollars per U.S. dollar, the demand for foreign exchange is 100 units per month, and the supply is only 50 units per month. Therefore, the Bank of Canada needs to supply the market with the additional 50 units of foreign exchange that are demanded. This means that the Bank of Canada needs to purchase foreign exchange in the amount of 50 units per month. So the correct answer is D) purchase; 50 units per month.

The Diagram Below Shows the Market for Foreign Exchange from the Perspective