Consider the exchange rate between the Malaysian ringgit and the euro. Suppose the Malaysian government and the Eurozone governments would like to hold the exchange rate at a target value of 8 ringgit per euro. However, a recent increase in the demand for Malaysian goods has increased the supply of euros caused the exchange rate to fall below the desired rate to the new equilibrium shown on the following graph.

1. In the absence of government intervention, the increase in the supply of euros causes the ringgit to _____ (appreciate/depreciate) against the euro, meaning that European exports would be ______ (cheaper/more expensive) to Malaysian buyers than they were at the original (target) value. This also affects the cost of Malaysian exports to European buyers, resulting in _____ (an increase/a decrease) in Malaysian net exports.
2. Suppose the governments of Malaysia and the Eurozone want to maintain the target exchange rate of 8 ringgit per euro. Which of the following activities would help to return the exchange rate to its target value?
CHECK ALL THAT APPLY.
A. The European Central Bank uses its ringgit reserves to purchase euros in the foreign exchange market.
B. The central bank in Malaysia uses its euro reserves to purchase ringgit in the foreign exchange market.
C. The central bank in Malaysia uses ringgit to purchase euros in the foreign exchange market.
D. The European Central Bank uses euros to purchase ringgit in the foreign exchange market.

INTEREST RATE (Percent) 6.0 New Curve Money Supply 5.5 5.0 4.5 4.0 Money Demand 3.5 3.0 2.5 2.0 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 Help QUANTITY OF MONEY (Trillions of dollars) Clear All