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1. Consider a foreign exchange market between the euro (labeled E) and the Swiss franc (labeled...

1. Consider a foreign exchange market between the euro (labeled E) and the Swiss franc (labeled F):

a) Illustrate the market equilibrium. Make up a specific equilibrium exchange rate. Be sure to label the graph carefully and completely. Be sure to put quantity of Swiss Francs on the horizontal axis. (10 points)

b) On a new graph, label a situation where the Swiss franc is an undervalued currency. Is Switzerland running a balance of payments surplus or deficit? Can you say anything about the Swiss current account in this situation? Explain. (10 points)

c) How would the Swiss central bank maintain the exchange rate you picked in part b)? Be specific about whether they need to buy or sell official reserves. (5 points). You do not need to explain.

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