Part 1: Use the line and double-drop line tools to draw a graph depicting the demand for and supply of U.S. dollars with the exchange rate expressed as pesos per dollar. Label all curves. Plot and label the equilibrium (E1).
Part 2: Suppose Mexico begins to increase its exports of oil to the U.S. Show what happens in the market for dollars assuming all else remains equal. Use the double-drop line tool to plot and label the new equilibrium (E2). Label all curves and points appropriately.
The country of Trovania has adopted a fixed exchange rate system under which it has decided to fix the exchange rate of its currency, the taro, at 8 U.S. dollars per taro. The central bank of Trovania is willing to maintain the value of its currency by engaging in exchange market intervention. In other words, the central bank will directly buy or sell its currency in the foreign exchange market. Suppose that the demand and supply curves for taro are given by D and S respectively.
Using the copy tool, shift the demand and/or the supply curve for taro to illustrate how the central bank of Trovania can maintain its exchange rate at 8 U.S. dollars per taro. Label the new graph(s) D2 and /or S2 as appropriate.