Reference no: EM132288658

€ / $ Exchange rate

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

Euro

Quantity demanded

275

250

225

200

175

150

125

100

75

Euro

Quantity supplied

25

50

75

100

125

150

175

200

225

The above table shows the euro/dollar (dollars per euro) foreign exchange market.

1. What is the equilibrium exchange rate and quantity?
2. If the European Central Bank decreases interest rates, what will happen to the supply and/or demand situation for the euro? How is the equilibrium exchange rate and quantity affected?
3. Suppose that EU inflation is higher than US inflation. What will happen to the supply and/or demand situation for the euro? How is the equilibrium exchange rate and quantity affected?
4. Suppose more Europeans travel to the United States. Using the table above, find the new equilibrium. Assume the shift(s) causes the affected curve(s) to shift by 50 in the appropriate direction.
5. Suppose that the Federal Reserve (the US central bank) takes measures to lower interest rates. Facing the same economic conditions, the European Central Bank also decides to lower interest rates. Using the data in the table above, calculate the new equilibrium. Assume the subsequent shift(s) causes the affected curve(s) to shift by 50 in the appropriate direction.