As in problem 5, note that Jordan fixes its national currency—the dinar against the dollar at 1.41 dollars per dinar.
a. Draw a diagram illustrating the market in which Jordanian dinars are traded for U.S. dollars, assuming that the equilibrium exchange rate is 2.00 dollars per dinar. (Put the number of dinars per month on the horizontal axis.)
b. Under the assumption in (a), would Jordan’s central bank be buying or selling Jordanian dinars in this market? Indicate the number of dinars per month that the central bank must buy or sell as a distance on your graph.
c. Based on your diagram and your answers so far, could Jordan continue to fix its currency at $1.41 per dinar forever? Why or why not?
d. Suppose that foreign currency traders believe that Jordan will soon allow the dinar to float. How would this affect the current supply and demand curves for dinars? (Draw new curves to indicate the impact.)
e. How would the events in (d) affect the number of dinars that Jordan’s central bank must buy or sell?