4. Suppose there is a small fictional country in the Mediterranean, called San Marco, that wishes...

 

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4. Suppose there is a small fictional country in the Mediterranean, called San Marco, that wishes to keep its currency, the Marco dollar (MS), pegged versus the Euro (Q), at an exchange rate of M$100-64. If the exchange rate were freely determined in the foreign exchange markets, the exchange rate would stabilize at M$100 - €5 austrate this situation in the market for foreign exchange (showing the supply and demand of local currency, and the fixed exchange rate). Is the Marco dollar overvalued or undervalued? How does this affect Net Exports? (4 points) b) Suppose the San Marco central bank can freely buy or sell foreign currency for local currency. What does the San Marco central bank need to do, in terms of buying or selling foreign currency for local currency, in order to maintain the pegged exchange rate? Elustrate in the diagram that you have drawn for part al, the amount of local currency that the central bank must buy or sell. What will happen to the foreign currency reserves of the San Marco central bank? (4 points) c) What will happen to the money supply because of the actions of the San Marco central bank in maintaining the exchange rate peg? Will this have an expansionary or contractionary effect on the economy? (4 points) 4. Suppose there is a small fictional country in the Mediterranean, called San Marco, that wishes to keep its currency, the Marco dollar (MS), pegged versus the Euro (Q), at an exchange rate of M$100-64. If the exchange rate were freely determined in the foreign exchange markets, the exchange rate would stabilize at M$100 - €5 austrate this situation in the market for foreign exchange (showing the supply and demand of local currency, and the fixed exchange rate). Is the Marco dollar overvalued or undervalued? How does this affect Net Exports? (4 points) b) Suppose the San Marco central bank can freely buy or sell foreign currency for local currency. What does the San Marco central bank need to do, in terms of buying or selling foreign currency for local currency, in order to maintain the pegged exchange rate? Elustrate in the diagram that you have drawn for part al, the amount of local currency that the central bank must buy or sell. What will happen to the foreign currency reserves of the San Marco central bank? (4 points) c) What will happen to the money supply because of the actions of the San Marco central bank in maintaining the exchange rate peg? Will this have an expansionary or contractionary effect on the economy? (4 points)

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a Marco dollarM is undervalued because of the reason that its exchange rate against E... View the full answer