The demand for and supply of shekels in the foreign exchange market are Demand 5 30,000 2 8,000e, Supply 5 25,000 1 12,000e, where the nominal exchange rate is expressed as U.S.

dollars per shekel. (LO3, LO5)

a. What is the fundamental value of the shekel?

b. The shekel is fixed at 0.30 U.S. dollars. Is the shekel overvalued, undervalued, or neither? Find the balance-of-payments deficit or surplus in both shekels and dollars. What happens to the country’s international reserves over time?

c. Repeat part b for the case in which the shekel is fixed at 0.20 U.S. dollars.