Unvervalued/overvalued undervalued/overvalued more/less shortage/surpluss revalu

Question

Unvervalued/overvalued

undervalued/overvalued

more/less

shortage/surpluss

revaluation/devaluation

revaluation/devaluation

7. Fixed exchange rates Consider the exchange rate between the Malaysian ringgit and the euro. Suppose the Malaysian government and the Eurozone governments agree to fix the exchange rate at 1.25 ringgit 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 1.25 1.00 L 0.75 O 0.50 Demand for Euros 0.25 12 16 QUANTITY OF EUROS (Billions) ? , which means At the official exchange rate of 1.25 ringgit per euro, the euro is that Malaysians pay and the Malaysian ringgit is for European exports than they would with a free-floating exchange rate At the official ringgit price of euros, there is a of euros in the foreign exchange market Suppose the governments in the Eurozone and Malaysia agree to change the official exchange rate from 1.25 ringgit per euro to 1 ringgit per euro The action represents a of the euro and a of the ringgit.

Explanation / Answer

a) The Euro has a higher supply than the equilibrium point that means the Euro is "overvalued" and the Malaysian ringgit is "undervalued", the Malaysian are paying "less" for the European exports.

b) At the official price, there is a "surplus" of euros in the foreign market.

c) "Devaluation" of Euro and "revaluation" of ringgit.  

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