Question

The demand for the Franconian franc in the foreign exchange market equals 14,000-3,000e and the supply of francs in the foreign exchange market equals 2,000+2,000e where e is the nominal exchange rate expressed in US dollars per franc. If the franc is fixed a 2 US dollars per franc, then to maintain this fixed rate Franconia's international reserves must:1. increase by 2,0000 francs per period.2. increase by 4,000 francs per period3. decrease by 2,000 francs per period.4. decrease by 4,000 francs per period

Answer 1

Answer:

3. Franconia's international reserves must decrease by 2,000 francs per period

Explanation:

Demand = 14,000-3,000e

Supply = 2,000+2,000e

e = $2/franc

Demand = 14,000-(3,000*2) = 14,000 - 6,000 = 8,000

Supply = 2,000+(2,000*2) = 2,000 + 4,000 = 6,000

Since demand is more than supply, this will lead to a reduction of,

Reduction = Demand - Supply = 8,000 - 6,000 = 2,000

Therefore, it will decrease by 2,000 francs per period.

Hope this helps!