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:

Chemical Reactions

Processes by which substances interact to form new products, involving the rearrangement of atoms and changes in chemical properties.

ADP

Adenosine Diphosphate (ADP) is an important organic compound in metabolism, used for energy transfer in cells.

Intermolecular Forces

Forces of attraction or repulsion which act between neighboring particles (atoms, molecules, or ions).

Electrostatic Attractions

The force of attraction between particles with opposite charges, fundamental in chemical bonding and interactions.