Consider that Britain is trying to maintain a fixed exchange rate with respect to the U.S. dollar. However, the present situation in the foreign exchange market is conducive for the British pound to depreciate with respect to the U.S. dollar. If the British government uses unsterilized intervention in the foreign exchange market, then it is expected that:

Question

Quizplus · Accepted Answer

Unsterilized intervention in the foreign exchange market involves the sale or purchase of domestic currency in exchange for foreign currency. In this case, the British government would be selling pounds and buying dollars in order to maintain the fixed exchange rate. This would lead to a decrease in the British money supply, as the government removes pounds from circulation and increases its holdings of dollars.

Consider That Britain Is Trying to Maintain a Fixed Exchange