Answer to Question #156572 in Macroeconomics for Suga

Question

Malaysia adopts a fixed exchange rate system in its trade with Pakistan. Assume that the Pakistani government decides to reduce import of palm oil from Malaysia. Explain and show the effect on equilibrium level of exchange rate between Malaysian Ringgit-Pakistan Rupee (MYR / RP), the values of the Malaysian Ringgit and Pakistan Rupee as well as the supply of Malaysian money. 

Answer 1

At a fixed rate the demand for Malaysian Ringgit is low where supply of Pakistan Rupee is high.This means there is low demand for Ringgit in exchange for Rupees.Therefore the fixed exchange rate will not be maintained at fixed level.The Malaysian currency will depreciate in value hence low supply