The Demand for the Franconian Franc in the Foreign Exchange

question 11

Multiple Choice

The demand for the Franconian franc in the foreign exchange market equals 14,000 - 3,000e and the supply of francs in the foreign exchange market equals 2,000 + 2,000e, where e is the nominal exchange rate expressed in U.S. dollars per franc. If the franc is fixed at 3 U.S. dollars per franc, then to maintain this fixed rate Franconia's international reserves must:

• A)decrease by 9,000 dollars per period
• B)increase by 9,000 dollars per period
• C)decrease by 3,000 dollars per period
• D)increase by 3,000 dollars per period

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Definitions:

Commercial Substance

Commercial substance refers to a transaction that significantly changes the economic position or cash flows of a business, going beyond a mere formal exchange.

Straight-Line Method

A method of calculating depreciation by spreading the cost of an asset evenly over its useful life.

Residual Value

The estimated value of an asset at the end of its useful life.

Depreciation

The method of distributing the expense of a physical asset throughout its life span.