13.

13 . Fixed exchange rates Consider the exchange rate between the Philippine peso and the euro. Suppose the Philippine government and the eurozone governments agree to fix the exchange rate (ER) at 2.5 pesos per euro, as shown by the grey line on the following graph. Refer to the following graph when answering the questions that follow. (? 4 0 3.5 Supply of Euros ER 25 20 EXCHANGE RATE (Pesos per euro) 1.5 10 Demand for Euros 0.5 0 B 12 16 20 24 32 QUANTITY OF EUROS (Billions)At the official exchange rate of 2.5 pesos per euro, the euro is and the Philippine peso is , which means that Filipinos pay w for European exports than they would with a free-floating exchange rate. At the official peso price of euros, there is a of euros in the foreign exchange market.14 . Balance of payments and the foreign exchange market The following graph shows the market for euros, which is initially in equilibrium. Suppose an economic expansion in Canada leads to an increase in the incomes of Canadian households, causing imports from Europe to rise. On the graph, illustrate the effect of an economic expansion on the market for euros by shifting the appropriate curve or curves. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. 200 O 1.75 Supply Demand .50 1.25 Supply EXCHANGE RATE (Dollars per euro) 1.00 Flexible exchange rates 0.75 Demand Fixed exchange rates 0.25 2 10 12 14 16 QUANTITY OF EUROS (Billions)On the previous graph, use the purple point (diamond symbol) to indicate the new equilibrium exchange rate and quantity under a system of flexible exchange rates. Under a system of flexible exchange rates, the dollar will until the foreign exchange market reaches an equilibrium exchange rate of Now suppose that Canada wants to maintain the initial equilibrium exchange rate of $1 per euro. On the previous graph, use a grey point (star symbol) to indicate the new equilibrium under a system of fixed exchange rates. Under a system of fixed exchange rates, which of the following policies could the Canadian government use to prevent the change in demand for euros from driving the exchange rate to the new equilibrium? Check all that apply. O Lower interest rates by way of monetary policy Place import restrictions on European goods O Sell Canadian euro reserves in the foreign exchange market