The currency used in the Duchy of Saxony is the ducet.The demand for the Saxonian ducet in the foreign exchange market equals 14,000 - 3,000e and the supply of ducets in the foreign exchange market equals 2,000 + 2,000e,where e is the nominal exchange rate expressed in dollars per ducet.If the ducet is fixed at $2 per ducet,then to maintain this fixed rate the Duchy of Saxony's international reserves must ____________ ducets per period.

Question

Quizplus · Accepted Answer

To maintain the fixed exchange rate of $2 per ducet, the demand for ducets in the foreign exchange market must equal the supply of ducets in the foreign exchange market. 
So, we set the demand equal to the supply: 
14,000 - 3,000e = 2,000 + 2,000e 
Solving for e, we get: 
e = 4 
This means that the nominal exchange rate is $4 per ducet. To maintain the fixed rate of $2 per ducet, the Duchy of Saxony must increase its international reserves. 
The amount of increase can be calculated by finding the difference between the demand and supply at the fixed exchange rate: 
14,000 - 3,000(2) - (2,000 + 2,000(2)) = 2,000 
Therefore, the Duchy of Saxony's international reserves must increase by 2,000 ducets per period.

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