6. Exchange rate crisis

The following graph shows the market for euros in terms of the Malaysian ringgit. The market is initially in equilibrium at 1 ringgit per euro and 30 billion euros traded per day. Suppose the ringgit falls in value, causing investors to sell their ringgitdenominated assets and to sell ringgit for euros in order to buyr eurodenominated assets. As a result, the demand for euros shifts to the right, from D0 to JD1 . . 2.0 -' 1.8 Supp 1.6 1.4 12 0.8 0.6 EXCHANGE RATE (Ringgit per euro) 0.4 02 0 B 12 18 24 30 36 42 43 54 6|) QUANTITY OF EUROS (Billions) If Malaysia wants to maintain a xed exchange rate of 1 ringgit per euro, it should V euros in the foreign exchange market. To be successful, this policy would have to V euros by |:| billion euros at any given exchange rate. If investors believe the ringglt is going to be V as a result of the change in demand, a speculative attack may occur. True or False: In the event of a successful speculative attack, foreign investors tend to suffer because Malaysian businesses are less able to pay their foreign debts. 0 True 0 False