The following graph shows the market for euros in terms of the Thai Baht. The market is initially in equilibrium at two baht per euro and 16 billion euros traded per day. Suppose the baht falls in value, causing investors to sell their baht denominated assets and to sell baht for euros in order to buy euro denominated assets. As a result, the demand for euros shifts to the right, from D1 to D2.

1. If Thailand wants to maintain a fixed exchange rate of two baht per euro, it should ____( sell/buy) euros in the foreign exchange market. To be successful, this policy would have to ______( increase the supply of/ decrease the supply of/ increased the demand for/ decrease the demand for) euros by ___ billion euros at any given exchange rate.
2. In this type of situation, a speculative attack may occur if investors believe which of the following statements?
A. Thailand is running out of euro reserves.
B. The demand for Thai goods is going to dramatically increase.
C. Thai assets are soon going to increase in value.
3. True or false: in the event of a successful speculative attack, Thai businesses tend to suffer because their foreign debt will now cost more to repay.

Transcribed Image Text:

10 cm diameter → Vertical 2 m →나.- 4 cm diameter Oil S 0.85) 2.2 m