Figure 15.2
Market for the British Pound

-Refer to Figure 15.2.Suppose the demand for pounds increases from D0 to D1.Under a fixed exchange rate system,the U.S.exchange stabilization fund could maintain a fixed exchange rate of $0.80 per pound by:
A) Selling pounds for dollars on the foreign exchange market
B) Selling dollars for pounds on the foreign exchange market
C) Decreasing U.S.exports,thus decreasing the supply of pounds
D) Stimulating U.S.imports,thus increasing the demand for pounds

Question

Figure 15.2
Market for the British Pound
 
-Refer to Figure 15.2.Suppose the demand for pounds increases from D0 to D1.Under a fixed exchange rate system,the U.S.exchange stabilization fund could maintain a fixed exchange rate of $0.80 per pound by:
A) Selling pounds for dollars on the foreign exchange market 
B) Selling dollars for pounds on the foreign exchange market 
C) Decreasing U.S.exports,thus decreasing the supply of pounds 
D) Stimulating U.S.imports,thus increasing the demand for pounds

Quizplus · Accepted Answer

If the demand for pounds increases, the exchange rate will tend to increase as well. If the U.S. wants to maintain a fixed exchange rate of $0.80 per pound, it needs to sell pounds for dollars on the foreign exchange market to decrease the supply of pounds and keep the exchange rate at the fixed rate.

Figure 15.2 Market for the British Pound