Suppose the market for euros is initially in equilibrium at $1.00 per euro and 4

Question

Suppose the market for euros is initially in equilibrium at $1.00 per euro and 4 billion euros, as seen on the graph below. Suppose an economic downturn in the United States leads to a drop in American incomes, causing imports from Europe to decline. The demand for euros shifts to the left, from D1 to D2. Under a system of flexible exchange rates, the dollar will until the foreign exchange market reaches an equilibrium exchange rate of .Now suppose that the United States wants to maintain the initial equilibrium exchange rate of $1.00 per euro. Which of the following U.S. government policies would prevent the change in demand for euros from driving the exchange rate to the new equilibrium level? Check all that apply. Reduce income taxes in the United States Place import restrictions on European goods Sell U.S. euro reserves in the foreign exchange market Suppose that the exchange rate between U.S. dollars and Brazilian reals is flexible and is determined by the forces of demand for and supply of the two currencies. Assume also that labor is immobile between the United States and Brazil due to high transportation costs. Which of the following situations is likely to happen as a result of a simultaneous decrease in the demand for U.S. goods and increase in the demand for Brazilian goods? The Brazilian unemployment rate increases, and the country undergoes bad economic times for a sustained period. The U.S. unemployment rate increases, and the country undergoes bad economic times for a sustained period. The U.S. unemployment rate rises at first, but then it drops as U.S. dollars depreciate against Brazilian reais. The U.S. unemployment rate rises at first, but it soon drops as unemployed Americans move to Brazil for employment.

Explanation / Answer

a)

Dollar will depreciate

b)

New exchange rate: Intersection of D2-S1 = $0.75 per euro

c)

Correct options: (b) and (c)

These will bring back the economy to original level

d)

Correct option: US unemployment rate rises at first, but then it drops as US dollars depreciate

(since labor is immobile and depreciated US $ will lead to increased demand for US goods and thus increased employment)

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.