What occurs in the foreign exchange market when the exchange rate is set above its equilibrium level?

Multiple choice question for Exchange-Rate Determination. Select an option, then review the explanation below.

Show Answers

There is a surplus of that currency available in the foreign exchange marketThere is a shortage of that currency in the foreign exchange marketThe supply curve of foreign exchange shifts to the rightThe supply curve of foreign exchange shifts to the left

Explanation

When the exchange rate exceeds the equilibrium price, the quantity of the foreign currency supplied surpasses the quantity demanded, resulting in an excess supply in the foreign exchange market.

Practice related questions from the same subject.

1.If a Big Mac costs $3 in the United States and 2 pesos in Mexico, what is the implied purchasing power parity (PPP) exchange rate between the peso and the US dollar?
2.If Japan, with its high savings rate, invests capital overseas, how is the Japanese yen likely to be affected, and what impact would this have on Japan's trade balance?
3.If interest rates are the same on similar assets in the U.S. and abroad, and investors expect the U.S. dollar to weaken relative to foreign currencies in the future, where are investment funds most likely to move?
4.If a country's money demand equals its money supply and its balance of payments is initially balanced, which of the following changes would cause the balance of payments to shift into a surplus?
5.Which market expectation would lead to the U.S. dollar strengthening against the Japanese yen?

What occurs in the foreign exchange market when the exchange rate is set above its equilibrium level?

Explanation

More Exchange-Rate Determination MCQs