The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound, U.S. demand for pounds would ________ the supply of pounds for sale and there would be a _______ of pounds in the foreign exchange market.
A) exceed; shortage
B) be less than; shortage
C) exceed; surplus
D) be less than; surplus
E) be equal to; shortage

Question

Quizplus · Accepted Answer

At an exchange rate of $1.72 per pound, which is higher than the equilibrium rate of $1.70, the U.S. demand for pounds would decrease because pounds are more expensive, while the supply of pounds for sale would increase as sellers are more willing to exchange pounds for dollars. This leads to a surplus of pounds in the foreign exchange market.

The Equilibrium Exchange Rate of Pounds Is $1