ECB has insufficient quantity of dollars on balance sheet

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Suppose that the fixed exchange between the euro and the dollar ( d o l l a r e u r o ) has been set at 1.5 by the European Central Bank (ECB). The equilibrium exchange rate is 1. Suppose that the quantity of euros supplied is 300,000 while the quantity demanded is 50,000 at the fixed exchange rate of 1.5.

Question: Suppose that the ECB has an insufficient quantity of dollars on its balance sheet. What is a possible consequence of this insufficiency? Group of answer choices The ECB may have to abandon the fixed exchange rate. This can lead to a rapid devaluation of the euro, which can lead to inflation and a disruption in supply chains. The ECB may have to increase the fixed exchange rate. This can lead to deflation. The ECB may have to abandon the fixed exchange rate. This can lead to a rapid devaluation of the euro, which can lead to deflation and an increase in economic growth. Deflation will occur, which will lead to a decrease in asset prices.

Reference no: EM133637283

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