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:

Project Analysis

The process of evaluating the financial and operational implications of a proposed project or investment to determine its viability and expected returns.

Net Present Value

An economic indicator for assessing an investment's gainfulness, which involves the deduction of the present value of cash expenditures from the present value of cash receipts over a certain period.

Minimally Required

The least amount that is necessary or allowed, especially in the context of financial or regulatory requirements.

Cash Inflows

Money or the amount of money received by a business from its operational, financing, and investing activities.