Excess supply of dollars Fixed exchange-rate system

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fig.3: excess supply of dollars


fig.3 describes excess supply of dollars. situation foreign demand goods, services, , financial assets european union exceeds european demand foreign goods, services, , financial assets. if supply of dollars rises ss s s , excess supply created extent of ab. ecb buy ab dollars in exchange euros maintain limit within band. under floating exchange rate system, equilibrium again have been achieved @ e.


when ecb buys dollars in manner, official dollar reserves increase , domestic money supply expands, may lead inflation. prevent this, ecb may sell government bonds , counter rise in money supply.


when ecb starts accumulating excess reserves, may revalue euro in order reduce excess supply of dollars, i.e., narrow gap between equilibrium , fixed rates. opposite of devaluation.








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