Figure 15-2
-Refer to Figure 15-2. Suppose the exchange rate between the dollar and the British pound
Is fixed at £0.3 per dollar. Now suppose U.S. residents choose to purchase more British goods and services. Under the terms of the Bretton Woods Agreement, what must happen to bring the exchange rate back to £0.3 per dollar?

Question

Figure 15-2 
-Refer to Figure 15-2. Suppose the exchange rate between the dollar and the British pound
Is fixed at £0.3 per dollar. Now suppose U.S. residents choose to purchase more British goods and services. Under the terms of the Bretton Woods Agreement, what must happen to bring the exchange rate back to £0.3 per dollar?

Quizplus · Accepted Answer

To maintain a fixed exchange rate, central banks may intervene by buying their own currency to increase its value or selling it to decrease its value. In this case, to bring the exchange rate back to £0.3 per dollar after an increase in demand for British goods (which would typically lead to a depreciation of the dollar relative to the pound), either the Federal Reserve (Fed) or the Bank of England would need to increase the demand for dollars. This could be done by purchasing dollars, which would help to counteract the increased demand for pounds and stabilize the exchange rate at the fixed level.

Figure 15-2 -Refer to Figure 15-2. Suppose the Exchange Rate Between the Rate