Money, Banking, and International Financeeuros for dirhams, decreasing the supply function and shifting it leftward. Thus, the exchange
rate returns within the band.
Price of Dirhams
($s per dirham)Quantity of Dirhams
Figure 8. The Currency Exchange Market for Dirhams
Price of Dirhams
($s per dirham)Quantity of Dirhams
Figure 9. A central bank intervenes in the currency market
Two important terms are associated with a pegged exchange rate. If a central bank allows
its currency to appreciate permanently outside the band, then we call it a revaluation. A central
bank may not strengthen its currency too often because the central bank accumulates capital
from the surplus inflow. On the other hand, if the central bank allows the currency to depreciate