Figure 19-8
-Refer to Figure 19-8.The equilibrium exchange rate is 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.After the shift,

Question

Figure 19-8

-Refer to Figure 19-8.The equilibrium exchange rate is 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.After the shift,

Quizplus · Accepted Answer

The shift in the demand curve from DS0U0B0 to D₂ indicates an increase in demand for euros, leading to an increase in the equilibrium exchange rate. As the ECB pegs the euro at a lower rate ($1.00/euro), the demand for euro increases even more as speculators expect the value of the euro to rise further. As a result, there is a shortage of euro at the pegged rate (point B) and the equilibrium exchange rate shifts from A to B. The shortage of euro is equal to the difference between the quantity of euros demanded at the new exchange rate (point B) and the quantity supplied at that rate, which is 800 million euros [(1,800 - 1,000) million euros]. Therefore, choice C is the best answer.

Figure 19-8 -Refer to Figure 19-8.The Equilibrium Exchange Rate Is at A,$1.25/euro.Suppose