The annual demand for and supply of shekels in the foreign exchange market is given as: 

    Demand = 30,000 - 8,000e

      Supply = 25,000 + 12,000e

The shekel is fixed  at 0.30 dollar per shekel. The country's international reserves are $600. Foreign financial investors hold checking accounts
in the country in the amount of 5,000 shekels. 

 a. Suppose that foreign financial investors do not fear a devaluation of the shekel, and thus do not convert their shekel
checking accounts into dollars. Can the shekel be maintained at its fixed value of 0.30 U.S. dollar for the next year?

b. Now suppose that foreign financial investors come to expect a possible devaluation of the shekel to 0.25 U.S. dollar.
Why should this possibility worry them?

c. In response to their concern about devaluation, foreign financial investors withdraw all funds from their checking
accounts and attempt to convert those shekels into dollars. What happens?

d. Discuss why the foreign investors' forecast of devaluation can be considered a "self-fulfilling prophecy."

 

 

The demand for and supply of shekels in the foreign exchange market are 

3000 – 8000e = 25,000 + 12,000e

5,000 = 20,000e

= 0.25 dollars/shekel

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