This Question Concerns the Mechanism of a Reserve Currency Standard

question 12

Essay

This question concerns the mechanism of a reserve currency standard.
Two countries, X and Y, have two currencies, x and y, fixed to the reserve currency, the U.S. dollar. Suppose the exchange rate between x and the U.S. dollar is 3x per dollar. Suppose the exchange rate between y and the U.S. dollar is 5y per dollar. Explain (using numbers) the mechanism if the x-y exchange rate was 0.5 x per y.

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Definitions:

Perfectly Competitive Firm

A company that sells a product for which there are many sellers and buyers, and where its product is identical to that of competitors, meaning it has no control over market price.

Marginal Revenue (MR)

The extra income a company earns by selling an additional unit of a product or service.

Demand Curve

A visual depiction of how the demand for a product or service correlates with its price over a specific time frame.

Profit-Maximizing

This refers to the process or level of output at which a business can achieve the highest profit, where marginal revenue equals marginal cost.