Suppose that the demand for euros in the foreign exchange market equals 8,000 - 2,000e and the supply of euros in the foreign exchange market equals 4,500 + 3,000e,where e is the nominal exchange rate expressed in dollars per euro.The market equilibrium value of the euro is _________ euros per dollar or ___ dollars per euro.

Question

Quizplus · Accepted Answer

At market equilibrium, demand equals supply. Therefore, we set the demand equal to the supply and solve for e:

8,000 - 2,000e = 4,500 + 3,000e

5,500 = 5,000e

e = 1.1

Therefore, the market equilibrium value of the euro is 1 euro per 1.1 dollars or 0.909 dollars per euro. Rounded to three decimal places, the answer is 1.428 euros per dollar or 0.7 dollars per euro, which is choice C.

Suppose That the Demand for Euros in the Foreign Exchange