The graph shows the rate fixed at ₹70 per dollar, below the market rate. How many dollars must the central bank sell from its reserves to hold the rate? Demand (D$) and supply (S$) of dollars cross at ₹80 per dollar, but the rate is fixed at ₹70 per dollar. At ₹70, $30 billion is supplied (A) and $50 billion is demanded (B).

The graph shows the rate fixed at ₹70 per…

The graph shows the rate fixed at ₹70 per dollar, below the market rate.

Question 33

MediumOriginal question

The graph shows the rate fixed at ₹70 per dollar, below the market rate. How many dollars must the central bank sell from its reserves to hold the rate?

Demand (D$) and supply (S$) of dollars cross at ₹80 per dollar, but the rate is fixed at ₹70 per dollar. At ₹70, $30 billion is supplied (A) and $50 billion is demanded (B).

$10 billionCorrect answerYour answer$20 billionCorrect answerYour answer$30 billionCorrect answerYour answer$50 billionCorrect answerYour answer

Show the answer and explanation

CorrectNot quiteAnswer B

Correct answer: B

At ₹70, $50 billion is demanded (B) but only $30 billion is supplied (A).
The shortage of 50 − 30 = $20 billion must be met from reserves.

Worth noting

$10 billion confuses the gap in rupees per dollar (80 − 70) with the gap in dollars.

Concept: Defending a fixed rate
Typical timeTypical: 70 s
Your timeYours: —

The rule this testsThe fixed rate: devaluation and revaluation

Practise this chapter →

Ten questions from Foreign Exchange Rate, at your own pace.

Practise this chapter →

Ten questions from Foreign Exchange Rate, at your own pace.

The graph shows the rate fixed at ₹70 per dollar, below the market rate.

Question 33

Explanation