The figure given below shows the demand curves for dollars arising out of Thai demand for U.S. goods and services and the supply of dollars arising out of the U.S. demand for Thai goods, services, and financial assets. D₁ and S₁ are the original demand and supply curves.?Figure 18.2

-Refer to Figure 18.2. Suppose investors predict that the value of Thai assets will decrease in the near future. This affects the current equilibrium exchange rate. To restore the original equilibrium, the Thai government intervenes in the foreign exchange market. How will this government action appear on the graph?
A) As a shift in the demand curve from D₂ to D₁
B) As a shift in the demand curve from D₁ to D₃
C) As a shift in the supply curve from S₁ to S₃
D) As a shift in the supply curve from S₁ to S₂
E) As a shift in the demand curve from D₂ to D₃

Question

The figure given below shows the demand curves for dollars arising out of Thai demand for U.S. goods and services and the supply of dollars arising out of the U.S. demand for Thai goods, services, and financial assets. D₁ and S₁ are the original demand and supply curves.?Figure 18.2
 
-Refer to Figure 18.2. Suppose investors predict that the value of Thai assets will decrease in the near future. This affects the current equilibrium exchange rate. To restore the original equilibrium, the Thai government intervenes in the foreign exchange market. How will this government action appear on the graph?
A) As a shift in the demand curve from D₂ to D₁ 
B) As a shift in the demand curve from D₁ to D₃ 
C) As a shift in the supply curve from S₁ to S₃ 
D) As a shift in the supply curve from S₁ to S₂ 
E) As a shift in the demand curve from D₂ to D₃

Quizplus · Accepted Answer

If investors predict that the value of Thai assets will decrease in the near future, this will lead to a decrease in the demand for Thai goods, services, and financial assets. As a result, the demand for dollars will decrease, shifting the demand curve from D₁ to D₂. This will lead to a new equilibrium exchange rate at point A, where the exchange rate is lower than the original equilibrium exchange rate. To restore the original equilibrium exchange rate, the Thai government will intervene in the foreign exchange market by selling Thai baht and buying dollars. This will increase the supply of dollars, shifting the supply curve from S₁ to S₂. The new equilibrium exchange rate will be at point B, which is the original equilibrium exchange rate. Therefore, the government action will appear as a shift in the supply curve from S₁ to S₂.

The Figure Given Below Shows the Demand Curves for Dollars