Final Answer:
If the U.S. government attempted to establish a fixed exchange rate at X1 after the demand shifted to D2, there would likely be a sustained imbalance in the foreign exchange market.
Step-by-step explanation:
Fixed Exchange Rate at X1: Establishing a fixed exchange rate at X1 implies that the government is committed to maintaining the value of the U.S. dollar at a specific level relative to the euro. In this case, X1 represents the desired exchange rate.
Demand Shift to D2: The demand for euros by U.S. residents has shifted to D2. This indicates an increased desire by U.S. residents to acquire euros at the existing exchange rate.
Imbalance in the Foreign Exchange Market: With a fixed exchange rate at X1 and increased demand at D2, there is likely to be a shortage of euros at the established rate. This imbalance can lead to either a continuous intervention by the government to meet the excess demand or a situation where the market forces challenge the fixed rate.
Market Forces and Fixed Rate Conflict: If the government continues to intervene, it may need to use its foreign exchange reserves to maintain the fixed rate, impacting its economic stability. Alternatively, market forces might challenge the fixed rate, leading to potential black market activities and difficulties in sustaining the desired rate.