Page 478 - Krugmans Economics for AP Text Book_Neat

2. List three tools used to fix exchange rates and explain the major
Answer (9 points)
costs resulting from their use.
Exchange
rate (Indian S
rupees per
U.S. dollar)
Surplus
Target
exchange
rate
E

D

0 Quantity of U.S. dollars
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.

436 section 8 The Open Economy: Inter national Trade and Finance