The document describes a decline in demand for the currency of Zeeonia, known as the zee, which causes the zee to depreciate relative to the US dollar under the current fixed exchange rate of $5 = Z1. To maintain the fixed exchange rate, policymakers would intervene in the zee market. Under a flexible exchange rate, the US trade surplus caused by falling zee demand would resolve as Americans import less from Zeeonia while Zeeonia buys more from the US, causing the zee to depreciate and dollar to appreciate until the surplus is eliminated.

1. The diagram below shows the market for the currency of Zeeonia, known as the zee (Z). The
current exchange rate is $5 = Z1 (five dollars equals one zee). Also shown is a decline in the
demand for zee.
This decline in demand causes the zee to ( select appreciate/decpricate) with respect to the
dollar.
a. In this diagram, show how policymakers would intervene in the market for zees in support of a
fixed exchange rate of $5 = Z1.
b. How would the U.S. balance-of-payments surplus that is caused by the decline in demand be
resolved under a system of flexible exchange rates?
Americans will import (select less/ the same amount/ more) from Zeeonia, and Zeeonia will
buy (select more/ the same amount/ less) from the United States. This will cause the zee to
(select depreciate/ appreciate) and the dollar to (select appreciate/ depreciate) until the surplus is
eliminated.
Solution
sorry, you havent posted the diagram.