Suppose the country of Stan has fixed its exchange rate to the dollar. The official exchange rate is 0.50 U. S. dollars per rupee. Suppose market conditions are such that the actual equilibrium exchange rate is 0.25 U. S dollars per rupee. 1. You are a tourist in Stan. Something you wish to buy costs 100 rupees. What is the price at official exchange rates? Are products bought from Stan a good deal?
2. You are a tourist in Stan. Something you wish to buy costs 100 rupees. What is the price if you could buy at the equilibrium exchange rate?
3. Will foreigners want to demand Stan’s rupees to buy goods at the official rate? Explain.
4. Will people in Stan want to buy U. S. goods at the official exchange rates? Will they being supplying or demanding their rupees?
5. Will the monetary authorities in Stan have to buy up a surplus of their currency or sell their currency to meet a shortage of their currency to keep the exchange rate at 0.50 dollars per rupee?