7. Fixed exchange rates Aa Aa Consider the exchange rate between the Malaysian r

Question

7. Fixed exchange rates Aa Aa Consider the exchange rate between the Malaysian ringgit and the euro. Suppose the Malaysian government and the euro zone governments agree to fix the exchange rate at 6 ringgit per euro. Refer to the following graph when answering the questions that follow EXCHANGE RATE (Ringgit per eurol 12.00 10.00 Supply o Euros 8.00 6.00 4.00 Official Value Demand for Euros 0.00 16 20 24 QUANTITY OF EUROS (Billions At the official exchange rate, the euro is , and the Malaysian ringgit is which overvalued undervalued undervalued overvalued means that Malaysians pay for European exports than they would with a free-floating exchange rate less more At the official ringgit price of euros, there is a market. equal to in the foreign exchange 16 billion euros 12 billion euros 4 billion euros 8 bllion euros shortage surplus Suppose the governments in the euro zone and Malaysia agree to change the official exchange rate from 2 ringgit per euro to 4 ringgit per euro. The action represents a ringgit of the euro and a of the revaluation devaluation devaluation revaluation

Explanation / Answer

Suppose the Malaysian government and Eurozone government agree to fix the exchange rate at 6 ringgit (MYR) per euro (EURO)

It means 1EURO = 6MYR (EURMYR =6)

In this case, the equilibrium exchange rate is 4 and official exchange rate is 2

A devaluation occurs when the official price of a currency is lowered and a revaluayion occurs when the official price of a currency is raised.

At official exchange rate, the EURO is undervalued. And the Malaysian ringgit is overvalued, which means Malaysians pay less for European exports that they would with a free-floating exchange arte.

At the official ringgit price of Euros, there is a shortage equal to 8 billion euros.

Suppose the governments in the euro zone and Malaysian agree to change the official exchange rate from 2 ringgit per euro to 4 ringgit per euro. The action represents a revaluation to the euro and devaluation of the ringgit.

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