The Following Figure Shows the Equilibrium in the Foreign Exchange

question 59

Multiple Choice

The following figure shows the equilibrium in the foreign exchange market where dollars are exchanged for yuan.

-Refer to the figure above.If the government of China wants to peg the exchange rate above E yuan per dollar,________.

• A) it will have to sell both dollars and yuan
• B) it will have to buy both dollars and yuan
• C) it will have to buy dollars and sell yuan
• D) it will have to buy yuan and sell dollars

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Definitions:

Profitability Index

A financial tool that calculates the relationship between the costs and benefits of a project by dividing the present value of future cash flows by the initial investment cost.

Mutually Exclusive

Situations or events that cannot occur at the same time—choosing one precludes the selection of the other.

Negative Net Present Value

A financial metric indicating that the present value of cash inflows is less than the present value of cash outflows, suggesting the investment is not financially viable.

Initial Cost

The upfront expense incurred to purchase an asset or to initiate a project.