436 section 8 The Open Economy: International Trade and Finance
Answer (9 points)
1 point:The vertical axis is labeled “Exchange rate (Indian rupees per U.S.
dollar)” and the horizontal axis is labeled “Quantity of U.S. dollars.”
1 point:Demand is downward sloping and labeled, supply is upward sloping
and labeled.
1 point:The equilibrium exchange rate and the equilibrium quantity of dollars
are labeled on the axes at the point where the supply and demand curves
intersect.
1 point:The fixed exchange rate level is depicted above the equilibrium
exchange rate.
1 point:Surplus
1 point:The quantity supplied exceeds the quantity demanded at the higher
fixed exchange rate.
1 point:The surplus is labeled as the horizontal distance between the supply
and demand curves at the fixed exchange rate.
1 point:Buy
1 point:The new demand curve is shown to the right of the old demand curve,
crossing the supply curve at the fixed exchange rate.
Quantity of U.S. dollarsTarget
exchange
rate0SDEExchange
rate (Indian
rupees per
U.S. dollar) Surplus
- List three tools used to fix exchange rates and explain the major
costs resulting from their use.