Question

7. Exchange-rate crisis Aa Aa The following graph shows the market for euros in terms of the Malaysian ringgit. The market is initially in equilibrium at two ringgit per euro and 4 billion euros traded per day. Suppose the ringgit falls in value, causing investors to sell their ringgit-denominated assets and to sell ringgit for euros in order to buy euro-denominated assets. As a result, the demand for euros shifts to the right, from D1 to D2 EXCHANGE RATE (Ringgit per eurol 4.0 3.5 3.0 2.0 * 0.5 0.0 0 1234 5 6 78 QUANTITY OF EUROS (Billions) If Malaysia wants to maintain a fixed exchange rate of two ringgit per euro, it should foreign-exchange market. To be successful, this policy would have to euros in the euros by billion euros at any given exchange rate If investors believe the ringgit is going to be , a speculative attack may occur. True or False: In the event of a successful speculative attack, Malaysian businesses tend to suffer because their foreign debt will now cost more to repay O False O True