The currency used in the Duchy of Saxony is the ducet.If the market equilibrium value of the exchange rate equals $1.40 per ducet,but the ducet is officially fixed at $1.50 per ducet,then the ducet exchange rate is __________ and,to maintain this exchange rate,there will be __________ in the government's stock of international reserves.

Question

Quizplus · Accepted Answer

The ducet exchange rate is overvalued because the market equilibrium value is $1.40 per ducet but the official fixed rate is $1.50 per ducet. To maintain this overvalued exchange rate, there will be a net decline in the government's stock of international reserves because there will be a higher demand for dollars (due to the overvalued ducet) and a lower demand for ducets in the foreign exchange market. This will result in an outflow of international reserves as the government sells its foreign currency reserves to buy ducets and maintain the fixed exchange rate.

The Currency Used in the Duchy of Saxony Is the Ducet.If