Since July 2001, the middle eastern nation of Qatar has pegged its currency, the Qatar riyal (abbreviation: QAR) to the U.S. dollar at 1 QAR = 0.27473 dollars (1 U.S. dollar = 3.64 QAR). This small nation is very dependent on petroleum exports, which represent 85% of its exports. Consider the following events that affect the demand and supply of the Qatar riyal to see what the government of Qatar would have to do to keep its exchange rate fixed and what possible consequences could result from these required actions. a. Suppose the demand for Qatar's oil increases causing the price of oil to increase. First, show the impact on the foreign exchange market for the Qatar riyal, then determine the monetary policy response necessary to maintain the current fixed exchange rate. Instructions: Use the tool provided 'De' to plot the new demand and supply curves. Plot only the endpoints of the line (2 points total). Fixed Exchange Rates Tools S Exchange Rate (USD/riyal) 1.41 D Q, Quantity (Qatar riyal) To maintain its fixed exchange rate, the central bank of Qatar must pursue (Click to select) monetary policy, which will shift cause a (Click to select) v. This policy creates a risk of (Click to select) b. In the fall of 2014, world oil prices fell by more than 50% as world demand for oil decreased, causing demand for the Qatar riyal to decrease from D to D1. Show the monetary policy response necessary to maintain the current fixed exchange rate. Instructions: Use the tool provided 'Si' to plot the new supply curve. Plot only the endpoints of the line (2 points total). Fixed Exchange Rates Tools S Si Exchange Rate (USD/riya) 1.41 D. D 02 Quantity (Qatar riyal) To maintain its fixed exchange rate, the central bank of Qatar must pursue (Click to select) monetary policy, which creates a risk of (Click to select)

a. In this scenario, the demand for Qatar's oil increases, which causes the price of oil to increase. This leads to an increase in the demand for Qatar riyal, as the country's oil exports become more expensive and more buyers want to purchase the currency. The resulting shift in the demand curve for the Qatar riyal is shown in the diagram below.

To maintain the fixed exchange rate, the central bank of Qatar must pursue expansionary monetary policy, which will cause an increase in the money supply. This policy creates a risk of inflation, as the increased money supply can lead to higher prices.

b. Monetary policy: The central bank of Qatar must increase the money supply to offset the decrease in demand for the Qatar riyal.

Risk: The risk is that this monetary policy could cause inflation.

This policy will cause a shift in the supply curve.

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