Figure 19-8
-Refer to Figure 19-8.The equilibrium exchange rate is originally 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.If the European Central Bank abandons the peg,the equilibrium exchange rate would be

Question

Figure 19-8 
-Refer to Figure 19-8.The equilibrium exchange rate is originally 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.If the European Central Bank abandons the peg,the equilibrium exchange rate would be

Quizplus · Accepted Answer

When the European Central Bank pegs the currency at $1.00/euro, the demand for euro shifts to D2 due to speculations that the value of euro will rise. The equilibrium exchange rate moves to point B at $1.50/euro. If the peg is abandoned, the equilibrium exchange rate would still be at point B as it represents the market demand and supply situation at $1.50/euro. Therefore, the answer is C.

Figure 19-8 -Refer to Figure 19-8.The Equilibrium Exchange Rate Is Originally at Is