What do reports that the dollar is "overvalued" mean? How will foreign exchange markets respond to this information? Support your answer graphically
What will be an ideal response?
If the dollar is "overvalued," that means that the current exchange rate (foreign currency per dollar) is greater than the relative purchasing power of the dollar. This implies that currency traders will reduce their holdings of dollars (the supply curve for dollars will shift to the right) and increase their holdings of other currencies against which the dollar is "overvalued." As the supply of dollars increases, the exchange rate will fall. The exchange rate will continue to fall until the dollar's value accurately reflects its relative purchasing power.
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As a consumer moves rightward along an indifference curve, the
A) consumer remains indifferent among the different combinations of goods. B) consumer generally prefers the combinations of goods farther rightward along the indifference curve. C) income required to buy the combinations of the goods always increases. D) relative price of both goods falls.
When an external cost exists in the production of a good, firms tend to
A) under-produce the good since society pays these costs. B) over-produce the good. C) keep production constant throughout the year. D) under-allocate resources to the production of the good.