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 1.25 pesos per euro, as shown by the grey line on the following graph.

Refer to the following graph when answering the questions that follow.

? 2.00 1.75 Supply of Euros 1.50 ER 1.25 EXCHANGE RATE (Pesos per euro) 1.00 0.75 Demand for Euros 0.50 0.25 0 0 1 2 3 4 5 6 7 8 QUANTITY OF EUROS (Billions)