The figure given below illustrates the market for British pounds. D_£ and S_£ are the demand and supply curves of the British pounds respectively. If the British government wants to peg the dollar per pound exchange rate at $2.50 per pound, what action would British monetary authorities have to undertake?

Question

Quizplus · Accepted Answer

To peg the exchange rate at $2.50 per pound, British monetary authorities would need to buy pounds and sell dollars until the exchange rate reaches the desired level. Option C involves buying 1 million pounds and selling 2.5 million dollars, which is consistent with this approach. Option A involves selling pounds and buying dollars, which would cause the exchange rate to fall below $2.50 per pound. Option B involves buying pounds and selling dollars, but not in sufficient quantities to reach the target exchange rate. Option D involves buying too many pounds and selling too many dollars, which would result in an exchange rate below $2.50 per pound.

The Figure Given Below Illustrates the Market for British Pounds