Maintain the fixed exchange rate at a depreciated level

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Reference no: EM132413364

Saudi Arabia pegs its currency (Riyal) against the U.S. dollar. Suppose that the Saudi government wants to have a depreciated currency to make its oil export competitive in the international market. To answer the questions below put $/Riyal on the vertical axis, and the quantity of Riyal demanded and supplied on the horizontal axis on an exchange rate curve.

1) At the depreciated exchange rate, analyze what happens to demand and supply of Saudi's Riyal?

2) What kind of action will the Central Bank of Saudi Arabia take to maintain the fixed exchange rate at a depreciated level?

3) What happens to the foreign reserve (in US dollars) as a result of the action taken by the central bank of Saudi Arabia?

Reference no: EM132413364

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