Draw a foreign exchange market diagram to show equilibrium with a fixed exchange rate. Suppose the initial exports X is $110, the supply curve is given by er = 0.01X, and the demand curve is given by er = 2.2 - 0.01X.

b) How does the increase in exports affect the current account balance and conditions in the foreign exchange market when the exchange rate is fixed? The increase in exports (Select One) the balance on current account in the balance of payments and (Select One) the supply of foreign exchangelect One)ign exchange market. In the diagram the increase in the current account balance, measured in Canadian dincreases 0 . The supply curve shifts to the (Select One) .c) The purchase or sale of foreign exchange reserves is required if the central bank defends the fixed exchange rate. Explain the bank's decision. To defend the fixed exchange rate at ERO the central bank (Select One) foreign exchange from the (Select One) (Select One) the difference between the market supply and Select One he fixed rate ERO. buys sells d) What are the effects on the holdings of official reserves and the monetary base? The central bank sale of US$ would (Select One) holdings of (Select One). (Select One reduce increase 38-15c) The purchase or sale of foreign exchange reserves is required if the central bank defends the fixed exchange rate. Explain the bank's decision. To defend the fixed exchange rate at ERO the central bank (Select One) foreign exchange from the (Select One) (Select One) the difference between the market supply and demand at the fixed rate ERO. (Select One) official reserves monetary base d) What are the effects on the holdings of official reserves and the monetary base? The central bank sale of US$ would (Select One) holdings of (Select One) (Select One) official reserves but not the monetary base monetary base but not the official reserves Official Time: 18:38:25 both the official reserves and the monetary baseb) How does the increase in exports affect the current account balance and conditions in the foreign exchange market when the exchange rate is fixed? The increase in exports (Select One) the balance on current account in the balance of payments and (Select One) the supply of foreign exchangelect One)ign exchange market. In the diagram the increase in the current account balance, reduces measured in Canadian dincreases . The supply curve shifts to the (Select One) c) The purchase or sale of foreign exchange reserves is required if the central bank defends the fixed exchange rate. Explain the bank's decision. To defend the fixed exchange rate at ERO the central bank (Select One) foreign exchange from the (Select One) (Select One) the difference between the market supply and demand at the fixed rate ERO. (Select One) equal to less than effects on the holdings of official reserves and the monetary base? greater than The central bank sale of US$ would (Select One) holdings of (Select One) .Question 10 [15 points] Draw a foreign exchange market diagram to show equilibrium with a fixed exchange rate. Suppose the initial exports X is $110, the supply curve is given by er = 0.01X, and the demand curve is given by er = 2.2 - 0.01X. a) Plot the supply and demand curves of the foreign exchange market. Plot the new supply curve if the supply of US dollars increases at all levels of exports by $30. Demand Curve Demand Curve Supply Curve New Supply Curve 1.5 Exchange rate 25 50 75 100 125 150 175 Reset US dollars b) How does the increase in exports affect the current account balance and conditions in the foreign exchange market when the exchange rate is fixed? The increase in exports (Select One) the balance on current account in the balance of payments and (Select One) the supply of foreign exchange in the foreign exchange market. In the diagram the increase in the current account balance, measured in Canadian dollars is $ 0 . The supply curve shifts to the (Select One) . (Select One) c) The purchase or sale of foreign exchange reserves is required if the cent right ds the fixed exchange rate. Explain the bank's decision