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7. Fixed exchange rates Consider the exchange rate between the Saudi riyal and the euro. Suppose the Saudi government and the Eurozone governments agree to fix the exchange rate at 2.5 riyal per euro, as shown by the grey line on the following graph Refer to the following graph when answering the questions that follow.4.0 3.5 Supply of Euros 3.0 2.5 ш2.0 O 1.5 Demand for Euros 1.0 0.5 0 2 101214 16 QUANTITY OF EUROS (Billions)At the official exchange rate of 2.5 riyal per euro, the euro is and the Saudi riyal is which means that Saudis pay for European exports than they would with a free-floating exchange rate At the official riyal price of euros, there is a of euros in the foreign exchange market. Suppose the governments in the Eurozone and Saudi Arabia agree to change the official exchange rate from 2.5 riyal per euro to 2 riyal per euro. The action represents a of the euro and a of the riyal

and the Saudi riyal isY change rate At the official exchange rate of 2.5 riyal per euro, the euro is which means that Saudis pay for European exports than they would with a overvalued At the official riyal price of euros, there isa of undervalued reign exchange market. Suppose the governments in the Eurozone and Saudi Arabia agree to change the official exchange rate from 2.5 riyal per euro to 2 riyal per euro. The action represents a of the euro and a of the riyal.

At the official exchange rate of 2.5 riyal per euro, the euro is and the Saudi riyal is, which means that Saudis pay for European exports than they would with a free-floating exchange rate undervalued At the official riyal price of euros, there is a of euros in the foreign exchange market. overvalued Suppose the governments in the Eurozone and Saudi Arabia agree to change the official exchange rate from 2.5 riyal per euro to 2 riyal per euro. The action represents a of the euro and a of the riyal.

At the official exchange rate of 2.5 riyal per euro, the euro is and the Saudi riyal is , which means that Saudis ー payfor European exports than they would with a free-floating exchange rate. more l yal price of euros, there is a of euros in the foreign exchange market. less Supposetre governments in the Eurozone and Saudi Arabia agree to change the official exchange rate from 2.5 riyal per euro to 2 rival per euro. The action represents a ▼ of the euro and a of the riyal.

At the official exchange rate of 2.5 riyal per euro, the euro is , and the Saudi riyal is which means that Saudis pay for European exports than they would with a free-floating exchange rate. At the official riyal price of euros, there is aof euros in the foreign exchange market. surplus Suppose the governments in the Eurozone action represents a abia agree to change the official exchange rate from 2.5 riyal per euro to 2 riyal per euro. The of the shortage of the riyal.

At the official exchange rate of 2.5 riyal per euro, the euro is and the Saudi riyal is which means that Saudis pay for European exports than they would with a free-floating exchange rate At the official riyal devaluationthere is a of euros in the foreign exchange market. revaluation Eurozone and Saudi Arabia agree to change the official exchange rate from 2.5 riyal per euro to 2 riyal per euro. The Suppose the goverr action represents a of the euro and a of the riyal

At the official exchange rate of 2.5 riyal per euro, the euro is , and the Saudi riyal is , which means that Saudis pay for European exports than they would with a free-floating exchange rate At the officil iyal price of euros, there is a devaluation the foreign exchange market. revaluation Suppose the governments in the Eurozone and Saudi Ar action represents a hange the official exchange rate from 2.5 riyal per euro to 2 riyal per euro. The of the euro and a of the riyal

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Answer #1

At the free floating exchange rate , or the market determined exchange rate is when demand & supply curve cuts each other

Thus equilibrium exchange rate is 2 riyal per euro.

Thus at fixed exchange rate of 2.5 riyal per euro,

( One euro could be exchanged for 2.5 riyal) , hence Euro is overvalued & Saudi Riyal is Undervalued.

thus Saudi pay more for European exports .

At official exchange rate , there is Shortage of euro in forex market .

Now if both nation decide to fix exchange rate at 2 riyal per euro, then euro gets Devalued & riyal gets revalued.

Hence devaluation of euro & revaluation of riyal.

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