Following three questions 1820 are based on the diagram belo

Following three questions (18-20) are based on the diagram below. Analyze the Diagram and answer.

Q 18. The Nominal Exchange rate is $1.15 per one Euro and the present market condition states that there are 300 billion euros are bought and sold daily.

            a.. True -------;            b. False -----

Q 19. Given the following factors which one do you think would cause a shift of the Supply curve to the left holding demand curve at its present position causing the equilibrium exchange rate to go up and quantity to go down?

a. European Central bank starts to buy Euro denominated Bonds

b. American tourists travel to Europe in large numbers

c. Chinese Investors who purchased Euro-denominated bonds now start selling those bonds

d. None of the above

20. Say, due to some policy changes the market experiences a surge in Demand for Euro as a result the demand curve shifts to D2 causing both the nominal exchange rate and the quantity to go up. Which one of the following may be a good reason for that?

a. European Central bank starts to SELL Euro denominated Bonds at a discounted price

b. American tourists travel to Europe in large numbers

c. Chinese Investors who purchased Euro-denominated bonds now are holding those bonds

d. All of the above

None of the

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Answer Questions 32-34 based on the following diagram:

32.   Due to Fed’s Open market purchase of securities the supply curve for Reserves shifts from S1 to S2.

            a. True -----;    b. False ----

33. The federal Funds Rate increases from 4.5% to 5% because of:

            a. Fed’s open market Purchase of treasury securities

            b. Fed’s open market Sale of treasury Securities

            c. Demand for Treasury increases because banks buy more treasury securities

            d. None of the above

34. Because of Fed’s Open market action, the Federal Funds rate increases from 4.5% to 5%, this would            lead to increase in money supply

            a. True -----; b. False ----

S2 S/Euro SI 1.15 D2 D1 300 B Qty of Euro

Solution

18.False.

Nominal exchange rate will be determined where D1 and S1 intersect.

19.When chines starts selling the bonds,they receive euros in return for the bonds.The supply of Euros will fall.

Answer-C.

20.When American tourists travel Europe in larger numbers,the demand for Euros rose because euro is required for transactions.

Answer-B

32.When Fed purchase securities,the supply curve of money rise and interest rate falls.The interest rate in the figure rises.

Answee-False.

33.Interest rate rises as a result of fall in the supply of money.Open market sale of securities reduces money supply.

Answer-B

34.False.